The Court of Appeals for the District of Columbia has affirmed a Securities and Exchange Commission order permanently barring a former financial executive from associating with any broker or dealer in a supervisory capacity and suspending him for 12 months from associating with any broker or dealer in any capacity. The petitioner had founded the firm, which was a registered broker-dealer, served as its president and controlled all aspects of the company’s business, including compliance. In March 2001, the petitioner, in his capacity as president of the firm, received a deficiency letter from the SEC, indicating that the company had committed various violations of federal securities laws, including a failure to “establish and employ adequate supervisory procedures.” Although petitioner took some remedial measures after receiving the deficiency letter, he largely ignored the deficiencies and continued to operate the firm with a “laissez-faire approach to supervision.”
In 2002 and 2003, two of the company’s employees conspired to conceal approximately $6.5 million in losses by entering fictitious trades into the company’s record system, omitting unprofitable trades from the records, and stealing $4.5 million from a customer account to cover the losses from unauthorized trading. Although petitioner was “entirely ignorant” of the scheme at the time, he was subsequently tried by the SEC and found to have violated Exchange Act Section 15(b) and Securities Investor Protection Act Section 14(b) for failing to exercise his supervisory duties.
On appeal to the D.C. Circuit, petitioner argued that the imposed sanctions he received were “arbitrary and capricious” because the SEC failed to address evidence of his character and experience, misconstrued the evidence, and imposed unnecessarily harsh sanctions. The Court rejected petitioner’s arguments, holding that the SEC’s interpretation of the evidence was reasonable and that evidence of petitioner’s character and professional accomplishments was immaterial in light of the substantial evidence of petitioner’s negligence and recklessness in the performance of his supervisory duties. In addition, the Court held that a lifetime bar from supervisory positions was an appropriate sanction given the “egregious” failure to implement even the most basic supervisory procedures. (Horning v. SEC, 2009 WL 1812765 (D.C. Cir. June 26, 2009))