Horning v. Securities & Exchange Commission

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued November 13, 2008 Decided June 26, 2009

No. 08-1038

STEPHEN J. HORNING,
PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,
RESPONDENT

On Petition for Review of an Order
of the Securities & Exchange Commission

Thomas D. Birge argued the cause and filed the briefs for
petitioner.

Dominick V. Freda, Senior Counsel, Securities & Exchange
Commission, argued the cause for respondent. With him on the
brief were Brian G. Cartwright, General Counsel, Andrew N.
Vollmer, Deputy General Counsel, Jacob H. Stillman, Solicitor,
and Randall W. Quinn, Assistant General Counsel.

Before: GARLAND and BROWN, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge GARLAND.
 2

GARLAND, Circuit Judge: Stephen J. Horning, the former
president and director of Rocky Mountain Securities &
Investments, petitions for review of an order of the Securities
and Exchange Commission (SEC). The Commission found that
Horning failed to exercise reasonable supervision over two
employees who violated the securities laws, and that he caused
his firm to commit numerous statutory and regulatory violations.
The Commission permanently barred Horning from associating
with any broker or dealer in a supervisory capacity and
suspended him for twelve months from associating with any
broker or dealer in any capacity. Horning contends that these
sanctions were arbitrary and capricious, that he was denied due
process in his administrative hearing, and that a provision of the
Securities Investor Protection Act of 1970 under which he was
sanctioned is unconstitutionally vague. Because we conclude
that the Commission’s order was reasonable and supported by
substantial evidence, and because Horning’s other challenges are
without merit, we deny the petition.

I

In 1980, Horning founded Rocky Mountain as a penny-
stock firm in Denver, Colorado. By the turn of the 21st century,
Rocky Mountain had grown into a medium-sized broker-dealer,
with approximately fifty registered representatives and more
than 5,500 customer accounts. From 1981 to 2003, Horning
served as president, director, financial and operations principal,
compliance officer, and registered representative at Rocky
Mountain. He was also the largest equity owner, holding nearly
40% of the shares at the time the firm closed.

Horning exercised substantial control over virtually every
aspect of Rocky Mountain. He managed the firm, set policy,
and oversaw daily operations. He had authority to hire and fire
employees. He bore primary responsibility for ensuring
 3

compliance with the SEC’s net capital, customer reserve, and
reporting requirements. He established the firm’s supervisory
procedures and oversaw their implementation, and he alone
supervised the operations and trading departments.

The first unmistakable sign that something was amiss at
Rocky Mountain appeared in early 2001, when a routine SEC
staff examination revealed that, from May 2000 to February
2001, the firm’s head trader, Judy Clarke, had failed to
document trades as required and the firm had suffered over
$600,000 in unreported losses. Each time Clarke bought and
sold stocks in Rocky Mountain accounts and executed trades on
behalf of its customers, she was supposed to chronicle the
transaction on a “trade ticket” and submit it to Horning for
approval and to the accounting department for recordkeeping.
The examination disclosed that Clarke had ignored these
procedures for more than $800,000 in purchases. Two other
Rocky Mountain employees -- Leslie Andrade, the head of
operations, and Tammy Steffen, the assistant director of
compliance -- knew about Clarke’s unrecorded trades but did
not tell Horning. Andrade was responsible for keeping the
firm’s books and records, working with its auditor, and
preparing the Financial and Operational Combined Uniform
Single Reports (FOCUS Reports) that broker-dealers must file
regularly with the SEC. See 17 C.F.R. § 240.17a-5. Andrade
reported to Steffen until the latter left the firm in the spring of
2001; from that time on, both Andrade and Clarke reported
exclusively to Horning.

In March 2001, following the staff examination, the SEC’s
Central Regional Office sent Horning, in his capacity as
president of Rocky Mountain, a deficiency letter outlining
numerous concerns that required “immediate corrective action
or response, without regard to any other actions that the
Commission may take or require to be taken as a result of the
 4

examination.” J.A. 696. Among other material deficiencies, the
letter stated that Rocky Mountain had failed to: (1) calculate
properly its net capital and customer reserves; (2) maintain
accurate records of its assets and liabilities; (3) file accurate net
capital computations in its annual audit reports; and (4) establish
and employ adequate supervisory procedures for the preparation
of its financial statements. In light of these failures, the letter
indicated, Rocky Mountain had violated the federal securities
laws.

The deficiency letter also pointed to troubling language in
the annual evaluations prepared by Rocky Mountain’s auditor,
Mortland & Co., a one-person company run by Horning’s
college friend, Herbert Mortland. Every year since the early
1980s, Mortland’s reports had highlighted weaknesses in Rocky
Mountain’s internal controls and warned that they “result in
more than a relatively low risk that errors or irregularities in
amounts that would be material . . . may occur and not be
detected within a timely period.” E.g., J.A. 674. The deficiency
letter advised that, notwithstanding these warnings, Mortland’s
audits had been inadequate in scope to detect the firm’s many
net capital and reserve requirement failings. This, too, violated
SEC rules.

Horning responded to the deficiency letter approximately
one month later. His brief missive to the SEC struck a defiant
tone. “In response to the alleged violations regarding [the rules
discussed in the deficiency letter],” Horning began, “we can
only say, that, after 20 years in business, we are obviously aware
of the above referenced rules and how such things as firm
related trading errors, improperly classified securities positions,
and the resultant inaccurate clearing account reconciliations can
impact all of them in a negative way.” J.A. 697. Horning
continued:
 5

The only comment that we would like to make at this
time is that these items certainly did not go undetected,
as you say in your letter, and also that we would
disagree with your statement that we do not have
adequate written supervisory procedures to detect any
inaccuracies in our clearing account reconciliations. In
reality, the exact opposite was and is true.

Id. The letter concluded by assuring the SEC that “[t]he people
at Rocky Mountain . . . responsible for these actions have been
spoken to and dealt with,” and that “[t]he deficiencies and
concerns addressed in your letter have all been remedied.” Id.
at 698.

Horning did take some remedial measures in response to the
deficiency letter. For example, he reduced the percentage return
that Clarke received on profitable trades. And he instructed
Andrade to prepare daily “reconciliation reports” documenting
that all executed trades were properly recorded and balanced in
Rocky Mountain’s books, along with daily “trade error reports”
documenting any trading irregularities or unreconciled trades
that had occurred.

For the most part, however, Horning preserved the
operational status quo. Although he later testified that the
conduct of Andrade and Clarke had been “[b]asically”
dishonest, J.A. 287, he declined to fire them, fine them, or
restrict their activities. Clarke continued to execute trades in the
firm’s proprietary account at her discretion, just as before.
Andrade continued to manage all of the firm’s books and
records, just as before. Horning did not establish any procedures
to monitor Clarke’s trading or to check the accuracy of
Andrade’s recordkeeping. Nor did he put in place any kind of
operations manual. Similarly, although Horning testified that he
was “very angry” at Mortland for failing to identify the
 6

problems flagged in the deficiency letter and that Mortland was
“partially at fault,” id. at 283, Horning declined to fire Mortland
or to demand new procedures for his subsequent audits. And he
continued to take no action in response to Mortland’s warnings
about inadequate internal controls.

Moreover, Horning’s implementation of those supervisory
procedures that did exist was often perfunctory. Horning
testified that he spent only two minutes reviewing each FOCUS
Report he signed, and that he reviewed the reconciliation reports
one day a week, for just ten seconds. Rocky Mountain kept
some customers’ funds in an omnibus money market account
managed by a brokerage firm named Reich & Tang Services,
which sent daily reports of transactions in the account. Horning
never checked whether the figures in Andrade’s daily reports or
the firm’s books matched the figures sent by Reich & Tang.
Nor did he review executed trades, seek to verify the trade error
reports, or inquire into whether the errors identified in the
reports had been corrected.

This laissez-faire approach to supervision turned out to be
a costly mistake, as Andrade and Clarke soon began to commit
serious fraud. From April 2002 through January 2003, the two
conspired to conceal approximately $6.5 million in losses that
Clarke accrued in unreported, unauthorized trading in Rocky
Mountain’s accounts. They did this by entering fictitious
profitable trades into the Rocky Mountain record system,
omitting unprofitable trades, and then plundering $4.5 million
in customer funds from the Reich & Tang account (as well as a
substantial amount of firm funds) to pay for the losses. The
firm’s books, records, and reports became increasingly
unmoored from reality. For more than six months in 2002, the
reconciliation reports and financial statements prepared by
Andrade never matched the daily reports sent by Reich & Tang.
In the months immediately preceding January 2003, Rocky
 7

Mountain’s records listed the Reich & Tang account as having
a value of greater than $4 million, while the Reich & Tang
reports themselves showed that the account was in fact worth
less than $100,000.

Horning testified that he was entirely ignorant of this
scheme until January 2003, when Rocky Mountain’s bank
informed him that the firm’s account was overdrawn.
According to Horning, no one at Rocky Mountain apart from
Andrade and Clarke had noticed the discrepancy between the
firm’s records and the Reich & Tang reports. He further
testified that, upon learning of Andrade and Clarke’s scheme, he
immediately connected it to the “basically” dishonest activities
revealed by the SEC staff examination. “I guess we’re back to
2001,” Horning remarked to the two of them. J.A. 433.

In February 2003, the SEC and the Securities Investor
Protection Corporation (SIPC) sued Rocky Mountain for
violating provisions of the Securities Exchange Act of 1934, 15
U.S.C. § 78a et seq. (“Exchange Act”). A trustee was
appointed; the firm was liquidated; and SIPC advanced more
than $5 million to the estate to compensate customers for their
losses. Andrade and Clarke were ultimately convicted of wire
fraud and sentenced to prison.

Just days before Rocky Mountain ceased doing business,
another college friend of Horning’s, Edward Moloney, hired
Horning and twenty-one other individuals associated with
Rocky Mountain to join his broker-dealer, Moloney Securities
Co. Horning became a director and regional vice president of
Moloney Securities. At the time the Commission issued the
decision challenged here, Horning was responsible for
supervising twenty-seven representatives, among them Mark
Depew and Buzz Massee, who had also worked for Horning at
Rocky Mountain.
 8

In February 2003, Horning learned that Depew and Massee
had loaned Clarke money the previous year without notifying
him, and that Clarke had repaid them in part with firm funds
generated by fictitious trades. At his administrative hearing,
Horning acknowledged that Depew and Massee should have
realized that some of those trades were fictitious because they
were made at “outlandish prices,” and that the conduct of
Depew and Massee in accepting Clarke’s repayments without
telling him had been “[p]robably” dishonest. J.A. 298-99.
Although Horning withheld from Depew and Massee the trading
profits they had purportedly earned in January 2003, he did not
investigate their dealings with Clarke or place them under any
form of heightened supervision at Moloney Securities.

In January 2006, the SEC instituted proceedings against
Horning. An administrative law judge (ALJ) held a hearing for
three days. Horning’s own expert witness, Larry Hayden,
testified that he was unaware of any other instance in which
employees who caused an unauthorized $600,000 loss to a firm
-- as Andrade and Clarke did in 2000-2001 -- had not been fired,
J.A. 482; that heightened supervision of Andrade and Clarke
“would probably have been appropriate” after March 2001, id.;
that reconciliation reports initialed by Horning contained
“obvious” mistakes, id. at 494-95; and that it was improper for
Rocky Mountain not to have a procedure in place to verify that
the Reich & Tang reports matched the firm’s internal records, id.
at 496-98. Hayden’s testimony on cross-examination
culminated in the following exchange regarding Horning’s
oversight of the Reich & Tang account:

Counsel for SEC: [A]nd yet you still conclude that
Mr. Horning’s supervision was reasonable; is that
right?
 9

Hayden: It was reasonable when I wrote my
report.

Counsel for SEC: Is it still reasonable today?

Hayden: I would alter my opinion in that regard.
....
Counsel for SEC: And you agree, therefore, [that]
the supervision was inadequate?

Hayden: I would agree, based on this information,
that it probably wasn’t adequate.

Id. at 499, 501.

Section 15(b) of the Exchange Act authorizes the
Commission to sanction a person associated with a broker or
dealer who “has failed reasonably to supervise, with a view to
preventing violations of the provisions of [the securities laws
and rules and regulations thereunder], another person who
commits such a violation, if such other person is subject to his
supervision.” 15 U.S.C. § 78o(b)(4)(E); see id. § 78o(b)(6)(A).
The ALJ found that Andrade and Clarke violated Exchange Act
§ 10(b) and SEC Rule 10b-5, and that Horning failed reasonably
to supervise Andrade and Clarke as required by Exchange Act
§ 15(b). Stephen J. Horning, Initial Decision Release No. 318,
88 S.E.C. Docket 2932, 2006 WL 2682464 (Sept. 19, 2006)
[hereinafter Initial Decision].

Exchange Act § 15(c)(3) requires that brokers and dealers
observe SEC rules prescribed to provide safeguards for the
broker or dealer’s financial responsibility when effecting the
purchase or sale of securities, 15 U.S.C. § 78o(c)(3)(A); section
17(a) provides that brokers and dealers must make and keep
records and reports required by SEC rules “for the protection of
 10

investors,” id. § 78q(a)(1); and section 17(e) requires that
brokers and dealers file annual statements certified by
independent public accountants, id. § 78q(e)(1)(a). The ALJ
found that Rocky Mountain violated sections 15(c)(3), 17(a),
and 17(e), and SEC rules thereunder, regarding net capital,
customer reserve, and recordkeeping and reporting
requirements. Under Exchange Act § 21C(a), a person can be
found to have caused such violations if he was responsible for
an act or omission that he knew or should have known would
contribute to such violations. Id. § 78u-3(a). The ALJ
determined that Horning was a cause of Rocky Mountain’s
violations pursuant to that provision.

Finally, Exchange Act § 15(b) specifically authorizes the
Commission to “suspend for a period not exceeding 12 months,
or bar . . . from being associated with a broker or dealer,” a
person who “has failed reasonably to supervise” another person
as required by that section, if the Commission finds that such
sanction “is in the public interest.” 15 U.S.C. § 78o(b)(6)(A),
(b)(4)(E). Section 14(b) of the Securities Investor Protection
Act of 1970 (SIPA) authorizes the Commission “to bar or
suspend for any period” any officer of any broker or dealer for
which a trustee has been appointed from being associated with
a broker or dealer if “the Commission . . . determine[s] such bar
or suspension to be in the public interest.” Id. § 78jjj(b).
Pursuant to these sections, the ALJ permanently barred Horning
from associating with any broker or dealer in a supervisory
capacity and suspended him for twelve months from associating
with any broker or dealer in any capacity. However, the ALJ
rejected the Enforcement Division’s recommendation of a
$250,000 civil penalty as unnecessary and punitive.

In the order now on review, the Commission affirmed all of
the ALJ’s key factual and legal findings and sustained her
choice of sanctions. Stephen J. Horning, Exchange Act Release
 11

No. 56886, Investor Protection Act Release No. 167, 92 S.E.C.
Docket 179, 2007 WL 4236161 (Dec. 3, 2007) [hereinafter
Commission Opinion].

II

Horning challenges the Commission’s order on three
principal grounds: (1) that the sanctions it applied to him were
arbitrary and capricious; (2) that the Enforcement Division’s
mid-hearing change to its sanctions request violated his due
process and statutory rights; and (3) that section 14(b) of SIPA
is unconstitutionally vague. We consider these challenges in
turn.

A

An appellate court must uphold the Commission’s findings
of fact if they are supported by substantial evidence. 15 U.S.C.
§ 78y(a)(4); Graham v. SEC, 222 F.3d 994, 999 (D.C. Cir.
2000). We must uphold its other determinations unless they are
“arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law.” 5 U.S.C. § 706(2)(A); Graham, 222 F.3d
at 999-1000. And we may not “disturb the Commission’s
choice of sanction unless it is either ‘unwarranted in law or . . .
without justification in fact.’” Wonsover v. SEC, 205 F.3d 408,
413 (D.C. Cir. 2000) (quoting Butz v. Glover Livestock Comm’n
Co., 411 U.S. 182, 185-86 (1973) (ellipsis in original)). We
therefore “accord great deference to the SEC’s [remedial]
decisions.” WHX Corp. v. SEC, 362 F.3d 854, 859 (D.C. Cir.
2004).

Horning does not contest any of the Commission’s relevant
factual findings, its legal conclusion that he was a “cause” under
Exchange Act § 21C(a) of Rocky Mountain’s various securities
violations, or its legal authority to impose the sanctions it chose.
 12

Nevertheless, he argues that the SEC’s sanctions decision was
arbitrary and capricious because the Commission failed to
address evidence of his character and experience, misconstrued
the auditor’s annual reports and the SEC’s 2001 deficiency
letter, and imposed unnecessarily broad sanctions.

Each of these arguments is fundamentally flawed. Each
fixates on a minor, discrete piece of the record while
disregarding the larger context. In reviewing the Commission’s
comprehensive evaluation of his conduct, Horning would have
us ignore the overall picture of his supervisory record and focus
instead on a few isolated pixels. We reject the gambit.

First, Horning chides the Commission for ignoring evidence
of his “long and successful career” and of his “skill and
trustworthiness” -- in particular, testimony by Moloney, his
friend and current employer, and by another friend who was a
Colorado state judge. Pet’r Br. 13-14. But the Commission’s
decision does not depend on discrediting Horning’s general skill
or trustworthiness. It rests instead on his patent failure to fulfill
his supervisory responsibilities.

The Commission found, on the basis of the overwhelming
evidence that we have detailed in Part I, that Horning was
negligent as a supervisor and principal and that he refused to
accept responsibility for his actions. As the Commission
observed, Horning did not only fail to take any steps to verify
the underlying information reflected in Rocky Mountain’s
books, records, and filings; he also routinely failed to notice
inconsistencies in the materials he did review. Every single
reconciliation report examined by the Commission contained
visible errors. Commission Opinion, at *4. To take just one
example: Horning initialed a report that states on its summary
page that $567,783.32 plus $953,821.54 equals $521,614.86.
Id.; J.A. 829. Horning saw nothing wrong in this arithmetic --
 13

no doubt because the ten-second review he acknowledged giving
the document was not enough time even to look at the numbers.

The Commission further found that, in light of the “prior
misconduct” of Andrade and Clarke and “the numerous red flags
that served to warn Horning that he could not rely on these
employees,” Horning should have placed them under heightened
supervision. Commission Opinion, at *10. Instead, he largely
abdicated his supervisory responsibilities. The new procedures
he implemented in 2001 were unhelpful, if not
counterproductive, as they gave Clarke an incentive to trade
more frequently and gave both Clarke and Andrade an incentive
to conceal unreconciled trades. Id. at *9 (describing Clarke’s
reduced commission per trade and the increased financial
penalties imposed for unreconciled trades). Horning’s review of
Andrade’s reports “was so superficial as to be worthless.” Id.
And it escaped Horning’s notice altogether that Andrade had
engineered an informal coup within the operations department,
removing two other employees from their role in reviewing the
Reich & Tang account. Andrade and Clarke’s fraudulent
scheme was “not particularly well concealed,” the Commission
noted. Id. Horning could have uncovered it -- and staved off
the demise of Rocky Mountain -- had he caught any of the
“numerous blatant errors” in the reconciliation reports, “taken
basic steps to ensure that the firm’s records were consistent with
those of its clearing agent,” or checked the information sent
daily by Reich & Tang against the firm’s internal records. Id. at
*9, *10.

Hence, while it is true that the Commission’s opinion does
not discuss Horning’s professional accomplishments or the
views of his character witnesses -- apart from one reference to
Moloney’s testimony that “he trusted Horning to fulfill his
supervisory duties,” id. at *13 -- these points were simply
 14

immaterial in light of the substantial evidence of Horning’s
actual negligence as a supervisor at Rocky Mountain.

Second, Horning argues that “[t]he Commission’s opinion
relies heavily on the assertion that the auditor’s reports provided
warnings to Horning which he ignored,” and that this was error
because, according to Horning’s reading, their “conclusion was
just the opposite.” Pet’r Br. 14-15. At oral argument, counsel
for Horning explained that it was unreasonable for the
Commission to conclude that the following passage -- repeated
year in and year out in the audit reports -- provided any kind of
relevant warning to Horning:

The Company’s plan of organization did not include
adequate separation of duties related to daily cash
receipt and cash disbursement activities.
Appropriate supervisory review procedures were
not instituted to provide reasonable assurance that
adopted policies and prescribed procedures were
adhered to.

E.g., J.A. 674, 692. According to Horning’s counsel, the second
sentence in this passage describes not a general failure of
supervisory procedures, as the Commission’s opinion intimated,
but only a failure of procedures related to cash receipt and
disbursement activities. Because Andrade and Clarke’s scheme
did not involve those activities, and because the audit reports
said that other procedures at Rocky Mountain were “adequate,”
id., Horning claims there was nothing remiss in his lackadaisical
response.

Notwithstanding Horning’s construction of the passage
from the audit reports, it was certainly reasonable for the
Commission to read those two sentences as referring to two
separate problems: the company’s failure to maintain adequate
 15

separation of duties related to daily cash receipt and
disbursement activities, and, more generally, its failure to
institute appropriate supervisory review procedures to provide
reasonable assurance that policies and procedures were adhered
to. More important, it is not true that the Commission’s opinion
relies heavily on the audit reports or that its reading of them
“pervades its entire opinion.” Pet’r Reply Br. 1. Throughout its
lengthy discussion of whether Horning violated the Exchange
Act and which sanctions were appropriate, the opinion mentions
the reports in only two sentences. Commission Opinion, at *8,
*13. Both times, the Commission cites Horning’s failure to
respond as just one item on a long list of supervisory
deficiencies.

Horning’s similar contention about the SEC’s 2001
deficiency letter fails for similar reasons. Horning maintains
that the Commission erred in viewing the deficiency letter as a
warning, because the letter “did not detect any internal control
problems with what eventually caused the collapse of Rocky
Mountain, the controls over the Reich & Tang account,” Pet’r
Br. 15 n.11, and because the SEC did not find at that time that
Andrade or Clarke had committed fraud or recommend
enforcement action against them, id. at 22-23. Once again,
Horning overstates the Commission’s reliance on one piece of
evidence and proposes an unrealistic standard for what counts as
a relevant warning. Even if Andrade and Clarke’s 2000-2001
misdeeds were not precisely of the same type or extent as their
2002-2003 misdeeds, the deficiency letter clearly raised a red
flag, and Horning’s weak response clearly reflected a casual
approach toward supervision.

Third, Horning contends that the Commission’s decision to
impose a lifetime bar from supervisory positions was excessive
and punitive. In choosing this sanction, he asserts, the
Commission “painted with too broad a brush” and “failed to
 16

articulate why a more narrow brush would still not serve to
protect the public interest.” Pet’r Br. 18. He further insists that
it was arbitrary and capricious for the Commission to refuse to
confine the supervisory bar and the twelve-month suspension to
finance and operations, the areas in which he committed
violations at Rocky Mountain. In Horning’s view, the
Commission never explained “the quantum leap of extrapolating
violations in one distinct area (financial and operational) to the
remaining 7 categories of principals that function in a broker-
dealer.” Id. at 20. We disagree.

In the opinion on review, the Commission found that
Horning’s supervisory failures were egregious and recurrent,
amounting to an “abdicat[ion] [of] his responsibility”; that he
“acted recklessly by failing to implement basic supervisory
procedures when confronted with previous misconduct”; that he
provided no reliable assurances against future violations and, to
the contrary, refused to acknowledge his own culpability; and
that his “continued association in a supervisory capacity with
Moloney Securities presents opportunities for future violations.”
Commission Opinion, at *13. In response to Horning’s
argument for carving out sales activities from the supervisory
bar, the Commission further found that his decision not to place
Depew or Massee under heightened supervision at Moloney
Securities, his prior “supervisory failures[,] and his fundamental
misunderstanding of the duties of a supervisor present[ed] too
great a risk to investors to allow him to remain in the industry as
a supervisor.” Id. The Commission therefore determined that
a full supervisory bar, coupled with a twelve-month suspension
from any association with a broker or dealer, was needed to
protect the investing public. Id. at *13-*14.

Every piece of this analysis is sound. The Commission
thoroughly evaluated Horning’s actions at Rocky Mountain, as
well as his statements on the witness stand, and drew plausible
 17

inferences about his expected future conduct. It then articulated
a reasonable, protective rationale for the penalties it selected.
Cf. PAZ Sec., Inc. v. SEC, No. 08-1188, --- F.3d ---, --- (D.C.
Cir. May 29, 2009) (“[P]etitioners err in arguing the
Commission must, in order to justify [its chosen sanction] as
remedial, state why a lesser sanction would be insufficient.”).
Although Horning refuses to accept responsibility for Rocky
Mountain’s demise, he does not seriously contest that he
effectively ignored the SEC’s 2001 deficiency letter, that he
failed to notice glaring errors during his perfunctory review of
important documents, that he could have uncovered Andrade
and Clarke’s plot with minimal effort, and that he took only
limited action in response to the evidence of misconduct by
Depew and Massee. Indeed, the record in this case is devoid of
a single example in which Horning actually identified an
operational problem or an unreconciled trade, reduced the
responsibilities of an employee, asked for an explanation before
signing a document, or endeavored to confirm the accuracy of
information his subordinates gave him. It is no surprise, then,
that Horning’s own expert witness agreed that Horning’s
supervision had been inadequate.

Contrary to Horning’s suggestion, the Commission is not
obligated to tailor its remedies to the precise job functions that
a defendant failed to perform, and it may regard past supervisory
problems in one area (e.g., finance and operations) as indicative
of future risk in a different area (e.g., sales) where similar
supervisory obligations apply. This case provides a good
example why that is so. Given Horning’s record at Rocky
Mountain, it requires not so much a “quantum leap,” Pet’r Br.
20, as a hop, skip, and a jump from the proof of his pervasive
supervisory failures to the conclusion that he would pose a risk
to the public in any supervisory capacity.
 18

B

In its pretrial brief to the ALJ, the SEC’s Enforcement
Division requested that Horning be barred from “supervisory,
non-supervised” positions in the industry. During the second
day of the hearing -- after the Division had completed its case-
in-chief and after Horning had begun his -- the Division changed
the relief it requested to a bar from all supervisory positions,
whether those positions are themselves supervised or not.
Horning asserts that the Division’s mid-trial correction -- not in
the charge against him but in the sanction the SEC sought --
deprived him of his constitutional right to due process and of his
statutory right to appropriate “notice and opportunity for a
hearing” before the imposition of sanctions, 15 U.S.C. §
78o(b)(6)(A); see also id. § 78jjj(b).

It is true, as Horning points out, that in In re Ruffalo the
Supreme Court held that a change in the charges against a
petitioner during “quasi-criminal” proceedings before the Ohio
Board of Bar Commissioners violated due process. 390 U.S.
544, 551 (1968). But as the Court subsequently explained in
Zauderer v. Office of Disciplinary Counsel, “the feature of
[Ruffalo] that was particularly offensive was that the change was
such that the very evidence put on by the petitioner in defense
of the original charges became, under the revised charges,
inculpatory.” 471 U.S. 626, 655 n.18 (1985). In Zauderer, by
contrast, the court found no due process violation where “the
variance [in] the theory” relied on by “the Board of Bar
Commissioners had no such prejudicial effect on appellant.” Id.

Nor was there any such prejudicial effect in this case.
Unlike the petitioner in Ruffalo, Horning had notice from the
outset of the nature of the charges against him. As the SEC
noted, “Horning was aware [all along] that the issue in the case
was the reasonableness of his supervision and that one of the
 19

sanctions being sought by the Division was a supervisory bar.”
Commission Opinion, at *14. The evidence that Horning
presented did not become inculpatory after the specific sanction
the Division sought was changed. Horning does not suggest that
anything stopped him from reorienting his defense during the
remainder of his trial presentation, or from doing so in his
subsequent administrative appeal to the Commission. And even
on this appeal, Horning does not explain how he was prejudiced
by the change in sanction request -- or even suggest a single
thing he would have done differently had that change not taken
place.

In the absence of any suggestion of prejudice, we cannot
conclude that Horning was deprived either of procedural due
process or of appropriate “notice and opportunity for a hearing.”
15 U.S.C. § 78o(b)(6)(A). Indeed, if there were any error at all,
it was at most a harmless one. See 5 U.S.C. § 706 (directing
reviewing courts to take “due account” of “the rule of prejudicial
error”); U.S. Telecom Ass’n v. FCC, 400 F.3d 29, 41 (D.C. Cir.
2005) (finding harmless error when petitioners failed to identify
additional arguments they would have raised before the agency
had the alleged procedural defect not occurred); PDK Labs. Inc.
v. U.S. DEA, 362 F.3d 786, 799 (D.C. Cir. 2004) (stating that,
under the harmless error rule, “[i]f the agency’s mistake did not
affect the outcome, if it did not prejudice the petitioner, it would
be senseless to vacate and remand for reconsideration”).

C

Finally, Horning contends that the SEC’s sanctions
determination was unlawful because section 14(b) of SIPA is
unconstitutionally vague. That section grants the Commission
authority to bar or suspend an officer or director of a broker or
dealer for which a trustee has been appointed if “the
 20

Commission . . . determine[s] such bar or suspension to be in the
public interest.” 15 U.S.C. § 78jjj(b).

Horning acknowledges that this court rejected a void-for-
vagueness challenge to section 14(b) in Dirks v. SEC, in which
we held that the SEC’s “narrowing and clarifying interpretation”
of that provision “to require a showing of negligence”
“eliminates any uncertainty that might otherwise have infected
section 14(b).” 802 F.2d 1468, 1471 (1986). He nonetheless
contends that this “narrowing gloss . . . provides no notice to a
respondent in Horning’s situation where the evidence supports
the conclusion that Horning reasonably believed that the firm
was in good financial condition.” Pet’r Br. 24. Horning’s
challenge has two flaws.

First, the evidence in this case does not support the
conclusion that Horning’s belief that Rocky Mountain was in
good financial condition was reasonable. Instead, the evidence
shows that Horning could persist in that patently false belief
only because of his own unreasonably deficient supervision. As
the SEC found, “Horning failed to exercise reasonable diligence
in his supervision of Clarke and Andrade and in performing his
duties with respect to the firm’s net capital, customer reserve,
and books and records requirements which resulted in the
collapse of the firm.” Commission Opinion, at *14.

Second, Horning’s attack on section 14(b) of SIPA is
legally irrelevant because section 15(b) of the Exchange Act, 15
U.S.C. § 78o(b), provides an independent ground for the
sanctions the Commission levied. Section 15(b) authorizes the
Commission, inter alia, to “suspend for a period not exceeding
12 months, or bar . . . from being associated with a broker or
dealer” a person who “has failed reasonably to supervise, with
a view to preventing violations of the provisions of [the
securities laws and regulations], another person who commits
 21

such a violation, if such other person is subject to his
supervision” and if the Commission finds that such sanction “is
in the public interest.” Id. § 78o(b)(6)(A), (b)(4)(E) (emphasis
added). As counsel for Horning conceded at oral argument, the
Commission based Horning’s sanctions independently upon
both SIPA and the Exchange Act, and Horning does not claim
that the latter has a vagueness problem. Thus, counsel
acknowledged, Horning’s void-for-vagueness challenge “only
makes a difference if the court decides that the sanction can’t be
upheld under the [Exchange] Act.” Oral Arg. Recording at
2:01-08; see Initial Decision, at *19 (explaining that “Section
15(b)(6) of the Exchange Act authorizes a [supervisory] bar”
and that “Section 14(b) of SIPA provides an independent basis
for barring Horning” (emphasis added)). Because we have
determined that Horning’s sanctions can -- and will -- be upheld
under the Exchange Act, his challenge to SIPA § 14(b) is
without consequence.

III

For the foregoing reasons, the order of the Commission is

Affirmed.