IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
April 17, 2009
No. 08-10404 Charles R. Fulbruge III
Clerk
SECURITIES AND EXCHANGE COMMISSION
Plaintiff – Appellee
v.
SCOTT B GANN
Defendant – Appellant
Appeal from the United States District Court
for the Northern District of Texas
Before JONES, Chief Judge, and WIENER and STEWART, Circuit Judges.
WIENER, Circuit Judge:
This civil enforcement action against Defendant-Appellant Scott B. Gann
(“Gann”), a stockbroker, arose out of Gann’s market-timing trades placed on
behalf of a client. The Securities and Exchange Commission (the “SEC”) alleged
that Gann violated Section 10(b) (“Section 10(b)”) of the Securities Exchange Act
of 1934 and Rule 10b-5 (“Rule 10b-5") promulgated thereunder by conducting
short-term trades in a number of mutual funds. Gann claimed that his trades
complied with the rules of the various funds and that, in any event, market
timing is legal and his practices were not deceptive. At trial, the district court
found Gann not credible and determined that he had violated Section 10(b) and
Rule 10b-5. Gann was ordered to disgorge his profits and pay a civil penalty.
No. 08-10404
The district court also imposed a permanent injunction against future violations.
Gann now asserts that the district court erred in finding that he made
material misstatements with an intent to deceive, as is required to find a
violation of Section 10(b) and Rule 10b-5. Additionally, he contends that, far
from supporting a finding of scienter, the evidence demonstrates his lack of
intent to deceive. Finding no clear error, we affirm the district court’s judgment.
I. FACTS AND PROCEEDINGS
In 2002, Gann and a co-worker at Southwest Securities, Inc. (“SWS”),
George Fasciano (“Fasciano”), put together a plan for a new customer, Haidar
Capital Management and Capital Advisor (“HCM”), to trade mutual funds by
timing the market. After HCM asked Fasciano whether SWS would be willing
to place market-timing trades on its behalf, Fasciano enlisted Gann to work with
him, and the two agreed to share all commissions.1
Market timing is not illegal, but many mutual fund companies prohibit
this type of trading of shares of their funds. Market timers typically buy and sell
shares of a mutual fund quickly to take advantage of minute, short-term
differentials between a fund’s value and the value of the securities it holds.
Fund companies object that market timers’ gains come at the expense of long-
term investors and increase transaction costs, so such companies employ a
number of strategies to discover and impede traders engaging in the practice.
Brokers who time the market sometimes receive “block notices” from funds in
which they have bought and sold shares. A block notice typically informs the
broker that he has run afoul of a fund’s restrictions and bars specified accounts
controlled by the broker from future trades. Brokers can be identified by their
registered representative number; clients can be identified by their account
number or numbers. A block notice might bar trades under the broker’s number,
1
Their commission rate was 1.5 percent of the total assets managed for HCM.
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No. 08-10404
the client’s account number, or the number attached to a brokerage or its branch
office. Despite the show of discouraging market timing, not all funds prohibit
the practice.2
Intending to accept HCM’s business, Gann and Fasciano undertook an
extensive survey of various fund companies’ market-timing rules and
requirements. All involved recognized that the trades would have to occur
“under the radar” of the various funds to avoid triggering block notices. SWS
then set up a trading desk to operate the HCM business. Gann and Fasciano
opened 21 accounts for nine HCM affiliates, albeit the investors in each were the
same.3 A third SWS employee was responsible for ensuring that the trades
complied with each fund’s market-timing rules and alerting funds to specific
large trades when so required.
Trading on HCM’s behalf began February 10, 2003. SWS received the first
block notice 15 days later. After receiving a block notice, Gann and Fasciano
would switch the identifier number they were using, enabling them to continue
trading, at least temporarily. Over seven months, they concluded 2,500 trades
— $650 million in aggregate value — in the mutual funds of fifty-six companies.
During this period, they received sixty-nine block notices — a rate of about 3
percent. Gann earned $56,640.67 for his work on behalf of HCM.
The SEC filed a civil enforcement action against Gann and Fasciano in
January 2005, asserting that the HCM trades had violated Section 10(b)4 and
2
See, e.g., SEC v. Tambone, 550 F.3d 106, 113 (1st Cir. 2008) (executives at fund
company agreed to at least 13 different market-timing arrangements); Prusky v. ReliaStar Life
Ins. Co., 532 F.3d 252, 255 (3d Cir. 2008) (defendants had negotiated permission to place
market-timing trades, within express limits, in the funds of ING).
3
Gann and Fasciano used their registered representative numbers and that of a joint
partnership they established to trade under HCM’s account numbers. Gann’s broker number
was attached to nine of the 21 account numbers, Fasciano’s to another nine, and the joint
partnership’s to three.
4
15 U.S.C. § 78j(b).
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No. 08-10404
Rule 10b-5.5 Fasciano settled without admitting wrongdoing.6 Following a
three-day bench trial, the district court found that Gann had made material
misstatements with intent to deceive in violation of Section 10(b) and Rule 10b-
5. The court entered judgment against Gann, requiring him to disgorge the
profits earned from the HCM trades 7 and to pay a $50,000 civil penalty, as well
as enjoining him from future violations. Gann timely appealed.
II. ANALYSIS
A. Standard of Review
In an appeal from a bench trial, we review the district court’s findings of
fact for clear error and questions of law de novo.8 We will find clear error if:
(1) the findings are without substantial evidence to support
them, (2) the court misapprehended the effect of the
evidence, and (3) although there is evidence which if credible
would be substantial, the force and effect of the testimony,
considered as a whole, convinces the court that the findings
are so against the preponderance of credible testimony that
they do not reflect or represent the truth and right of the
case.9
B. Scienter
Gann unquestionably engaged in market timing. The question here is
whether he did so in a manner that violated Section 10(b) and Rule 10b-5.10 The
5
17 C.F.R. § 240.10b-5.
6
In his settlement, Fasciano agreed to disgorge his profits from the transactions, pay
a $30,000 civil penalty and to a permanent injunction against future violations.
7
$56,640.67 plus pre-judgment interest.
8
Water Craft Mgmt. LLC v. Mercury Marine, 457 F.3d 484, 488 (5th Cir. 2006) (quoting
In re Mid-South Towing Co., 418 F.3d 526, 531 (5th Cir. 2005)).
9
Id. (citing Moorhead v. Mitsubishi Aircraft Int'l, Inc., 828 F.2d 278, 283 (5th
Cir.1987)).
10
The scope of liability is the same under both provisions. See, e.g., SEC v. Zandford,
535 U.S. 813, 816 n.1 (2002).
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No. 08-10404
SEC was required to show, by a preponderance of the evidence,11 that the
defendant, (1) made a misstatement or omission (2) of material fact (3) in
connection with the purchase or sale of securities (4) with scienter.12 To have
acted with scienter, the defendant must have acted with “a mental state
embracing intent to deceive, manipulate, or defraud.” 13
As noted, Gann first insists that (1) there is no evidence that he made
material misstatements; and (2) rather than demonstrating that he had the
requisite mental state, the evidence proves his lack of intent to deceive.14
1. Material Misstatement
The material misstatements at issue are Gann’s use of different and
varying client account numbers to disguise the frequency and magnitude of
HCM’s trading in the various funds. To commit securities fraud in violation of
Section 10(b) and Rule 10b-5, a defendant must act intentionally or with severe
recklessness, which is defined as a “highly unreasonable omission[] or
11
See, e.g., SEC v. First Fin. Group of Tex., 645 F.2d 429, 435 (5th Cir. May 1981)
(citing with approval SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1168 (D.C. Cir. 1978)).
12
17 C.F.R. § 240.10b-5; Aaron v. SEC, 446 U.S. 680, 691 (1980) (violation of Section
10(b) and Rule 10b-5 requires defendant to have acted with scienter); see also Plotkin v. IP
Axess Inc., 407 F.3d 690, 696 (5th Cir. 2005) (stating the rule in a private civil action).
13
Nathenson v. Zonagen Inc., 267 F.3d 400, 408 (5th Cir. 2001) (addressing scienter in
a securities fraud case and quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12
(1976)).
14
In his brief, Gann purports to claim errors of law with respect to his material
misstatement and scienter arguments. He offers no legal analysis, however, so we find any
such arguments waived. N.W. Enters. Inc. v. City of Houston, 352 F.3d 162, 183 n.24 (5th Cir.
2003) (“A litigant’s failure to provide legal or factual analysis results in waiver.”). An
appellant’s brief must contain his “contentions and the reasons for them, with citations to the
authorities and parts of the record on which the appellant relies.” FED . R. APP . P. 28(a)(9).
5
No. 08-10404
misrepresentation[].” 15 That omission or misrepresentation must be material,16
that is, it must be reasonably calculated to influence the decisions of an investor
— institutional or otherwise — in its trading in securities.17 That which is
reasonably calculated to influence the individual investor may not be reasonably
calculated to influence an institutional investor, and vice versa. Here, Gann
does not challenge the materiality of the alleged misrepresentations; rather, he
contends that there were no misrepresentations. The district court held that
Gann’s practice of switching identifying broker and client account numbers
constituted materially misleading statements in violation of the securities laws.
Gann’s claim of district court error in this regard essentially asks us to
adopt his view of the facts. He contends that SWS was in contact with the fund
companies before and after the block notices were sent. As such, the fund
companies were aware that Gann continued trading and could not have been
misled. In support of this, Gann points to the testimony of a co-worker and of
an HCM representative that the system SWS put in place to run the HCM
trades was meant to ensure that the trades would be compliant with the various
15
Ind. Elec. Workers’ Pension Trust Fund IBEW v. Shaw Group, Inc., 537 F.3d 527, 533
(5th Cir. 2008).
16
17 C.F.R. § 240.10b-5.
17
The district court considered a misrepresentation to be material if “a reasonable man
would attach importance to the fact misrepresented in determining his course of action.” The
district court quoted the rule from Wheat v. Hall. 535 F.2d 874, 876 (5th Cir. 1976) (private
civil damages suit). The danger of misleading the “victim” must have been known or “so
obvious that the defendant must have been aware of it.” Nathenson, 267 F.3d at 408. We have
not defined “material” for the purposes of a civil enforcement action, but we have held that,
in private civil litigation, a misrepresentation is material when it “would have been viewed by
the reasonable investor as having significantly altered the ‘total mix’ of information made
available.” Rosenzweig v. Azurix Corp., 332 F.3d 854, 865-66 (5th Cir. 2003) (quoting Basic,
Inc. v. Levinson, 485 U.S. 224, 231 (1988)). Other circuits have said that, in a civil
enforcement action, a statement or omission is “material” “if there is a substantial likelihood
that a reasonable investor would consider the information significant when making an
investment decision.” See, e.g., SEC v. Wolfson, 539 F.3d 1249, 1262 (10th Cir. 2008).
6
No. 08-10404
funds’ rules. He also points us to his own testimony and that of the co-worker
that the fund companies’ block notices were not the last word on what they
would permit. And, he states that HCM was on notice that SWS intended to
comply with the funds’ market-timing regulations. These assertions ignore that,
irrespective of whether SWS had an elaborate notification system in place, the
claim is that the funds were still misled. They also ignore that HCM’s view is
irrelevant. What matters is the perception of the fund companies. Notably,
Gann does not point to anything that indicates the fund companies were aware
of SWS’s notification system.
Gann’s argument overlooks the standard of review in this case. Even if we
were persuaded that his might be the better view of the facts, this would be
insufficient to permit us to reverse the district court. His view of the facts may
be plausible, but that is not evidence of clear error when, as here, the district
court’s interpretation is reasonable.
The SEC’s proof that Gann’s use of different numbers to conduct his trades
demonstrates that he did not want the fund companies catching on to his trading
practices. In one instance, Fasciano traded a Goldman Sachs fund three times
and received a block notice, yet he and Gann placed five more trades under a
different number, received two more block notices, and still continued placing
trades. Goldman Sachs repeatedly attempted to stop Gann and Fasciano from
trading in its fund, and they repeatedly switched identifier numbers to
misrepresent the source of the trades and thwart the company’s attempts.18 We
view the SEC’s characterization of the use of multiple registration and account
numbers as ample evidence of an intent to mislead.
18
The district court enumerated Gann’s similar pattern of trading in the shares of a
half-dozen mutual funds.
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No. 08-10404
Neither are we the first to consider the question. In United States v.
Ficken, the First Circuit affirmed a similar finding, although on stronger facts.19
In that case, the district court found the broker’s numbers-switching a material
misrepresentation and sufficient evidence of scienter under Section 10(b) to grant
summary judgment in favor of the government, and the First Circuit affirmed.20
Here, the district court’s finding that the use of various and changing identifier
numbers was a material misrepresentation constituted a reasonable
interpretation of the facts and thus was not clearly erroneous.
2. Evidence of Scienter
Gann’s second argument is that, in contrast to the district court’s finding,
the evidence at trial demonstrated that he lacked the scienter necessary to
violate Section 10(b) and Rule 10b-5. As with his material misrepresentation
point of error, Gann’s scienter argument is largely devoted to recounting his view
of the facts; and the court’s factual basis for finding that Gann made material
misrepresentations and that he acted with scienter are very similar. Again, our
standard of review is deferential and is here determinative. “If the district
court’s account of the evidence is plausible in light of the record viewed in its
entirety, the court of appeals may not reverse it even though convinced that, had
it been sitting as trier of fact, it would have weighed the evidence differently.”21
Gann’s primary contention is that the SEC mischaracterized the fund
companies’ rules regarding market timing, making it seem as though they were
blanket prohibitions on the trading strategy. Gann claims that, as a result of
19
United States v. Ficken, 546 F.3d 45, 51, 54 (1st Cir. 2008). Ficken had at least seven
broker registration numbers under his name and opened more than 170 accounts for five
clients using fake names to conceal their identity.
20
Id.
21
Estate of Lisle v. Comm’r of Internal Revenue, 541 F.3d 595, 601 (5th Cir. 2008)
(quoting Anderson v. Bessemer City, N.C., 470 U.S. 564, 573-74 (1985)).
8
No. 08-10404
this, the district court incorrectly believed that any attempt to time the market
would violate the funds’ regulations and harm investors, and, thus must have
been intended to deceive.22 Gann rationalizes his attempts to fly below the
funds’ radar, as it were, by claiming this meant only that his trades would not
attract the companies’ attention because they were compliant. He asserts that
the fund companies permitted market timing to an extent so such trades could
be conducted without deception. From his perspective, the research that he and
Fasciano undertook evidenced SWS’s intent to comply with the funds’ various
rules, not to evade them. He advances that some fund companies expressly
permitted market-timing activities within prescribed boundaries, and that
others did so either tacitly or by agreement. Gann reasons that efforts by SWS
to comply with the rules and determine how compliant market-timing trades
could be placed — as well as some companies’ agreements to permit such trades
— confirm that the brokers had no intent to deceive.
The SEC is essentially enforcing corporate regulations on behalf of the
various mutual funds. Because market timing itself is not illegal, the SEC had
to prove an intent to deceive to fit Gann’s behavior within Section 10(b) and Rule
10b-5. This creates a dilemma for the courts, which are asked to determine
whether the defendant’s legal acts are made illegal by his compliance or non-
compliance with corporate regulations that companies sometimes suspend or
ignore, either tacitly or expressly, depending on the circumstances of that
particular trade. AIM Funds, for example, reserves the right to reject trades
that it deems harmful to its investors, and it limited SWS to 10 trades per
account. In AIM Funds’s block notice to SWS, it identified a client account
22
To repeat, the complaint about market timing is that it dilutes returns for long-term
investors and increases the funds’ own trading costs. See, e.g., United States v. Tambone, 550
F.3d 106, 112 (1st Cir. 2008). Here, the district court found only that Gann intended to
deceive the fund companies, rather than individual investors. The SEC had claimed both.
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No. 08-10404
number (an HCM account) that would no longer be permitted to trade. The
Hartford, in contrast, issued a blanket block on all future trades by Gann until
he could show compliance.
The SEC’s chief evidence of Gann’s intent to deceive was his use of
numerous account and registration numbers that actually represented his (and
Fasciano’s) work for HCM. The SEC contended that Gann’s efforts were meant
to circumvent the funds’ regulations for his own gain and that of his customer.
We perceive the evidence in this case to be in equipoise, making critical the
question of credibility. The district court found Gann not credible and sided with
the SEC. Based on this express finding, the district court adopted the SEC’s
version of the facts. Credibility is uniquely “the province of the trier of fact,” and
we defer to it.23
Gann has not made a factual showing that so outweighs the evidence
offered by the SEC as to demonstrate that the district court clearly erred.
“Where there are two permissible views of the evidence, the factfinder’s choice
between them cannot be clearly erroneous.” 24 Having no “definite and firm
conviction that a mistake has been committed,” 25 we affirm.
C. Penalties
The district court imposed three penalties on Gann: (1) a permanent
injunction against violating Rule 10b-5 and Section 10(b), (2) disgorgement of his
profits with interest, and (3) a civil penalty of $50,000. Gann contends that
these penalties were assessed in error. He makes no legal argument whatsoever
as to how the district court erred with respect to the disgorgement and civil
23
In re Mid-South Towing Co., 418 F.3d 526, 535 (5th Cir. 2005).
24
Anderson v. Bessemer City, N.C., 470 U.S. 564, 574 (1985).
25
Canal Barge Co. v. Torco Oil Co., Inc., 220 F.3d 370, 375 (5th Cir. 2000). We
emphasize again, however, that market timing is not illegal. The SEC’s prosecution of Gann
is based on the fund companies’ regulations and Gann’s violation of those regulations.
10
No. 08-10404
penalty — only asserting once again that the district court got the facts wrong.
As a result, Gann has waived these arguments and we affirm the monetary
penalty and disgorgement.26
With respect to the injunction, Gann asserts that because he no longer
trades mutual funds, the injunction should not issue. We review the grant of a
permanent injunction for abuse of discretion.27 Without more, a defendant’s past
violation of the securities laws here at issue is insufficient to support permanent
injunctive relief.28 Instead, we ask whether the defendant’s past conduct gives
rise to an inference that, in light of present circumstances, there is a “‘reasonable
likelihood’ of future transgressions.” 29 In imposing a permanent injunction, the
district court must consider a number of factors, including the (1) egregiousness
of the defendant’s conduct, (2) isolated or recurrent nature of the violation, (3)
degree of scienter, (4) sincerity of defendant’s recognition of his transgression,
and (5) likelihood of the defendant’s job providing opportunities for future
violations.30
Gann’s sole argument is that, as he no longer sells mutual funds, the
injunction is unnecessary. He ignores the fact that whether a defendant’s job
will provide future opportunities for a violation is only one of the factors that the
district courts consider. Even if he were correct that his cessation of selling
mutual funds counseled against the issuance of the injunction, he completely
ignores the other factors on which the district court relied. Gann’s conclusional
26
Procter & Gamble Co. v. Amway Corp., 376 F.3d 496, 499 n.1 (5th Cir. 2004) (“Failure
adequately to brief an issue on appeal constitutes waiver of that argument.”).
27
ITT Educ. Servs., Inc. v. Arce, 533 F.3d 342, 344 (5th Cir. 2008).
28
SEC v. Zale Corp., 650 F.2d 718, 720 (5th Cir. July 1981).
29
Id. (surveying cases from the Third, Fifth and Ninth circuits).
30
SEC v. Blatt, 583 F.2d 1325, 1334 n.29 (5th Cir. 1978).
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No. 08-10404
assertion is not only an insufficient basis on which to overturn the injunction,
it also ignores the substance of the factor with which he takes issue. The
question is whether his job provides opportunities for future infractions. Gann
is still a stockbroker, so whether or not he trades mutual funds, his job certainly
permits him the opportunity to do so. Gann’s argument is insufficient to
persuade us that the district court’s conclusion on this factor was incorrect,
much less that it was an abuse of discretion outweighing the other independent
factors. We affirm the imposition of the injunction.
III. CONCLUSION
For the foregoing reasons, the judgment of the district court is
AFFIRMED.
12