The SEC's case against regulatory gadfly Richard Goble could come back to haunt it.
In a 2008 case involving Mr. Goble, known for his campaign to run dissident candidates for seats on the board of the
Financial Industry Regulatory Authority Inc., lawyers are worried that the main statute used to prosecute him for fraud — Section 10(b) of the Securities Exchange Act of 1934 — has been undercut by a federal appellate court.
The brewing legal controversy arose from a May decision by the 11th U.S. Circuit Court of Appeals, which threw out a fraud charge against Mr. Goble, the former owner of North American Clearing Inc. of Longwood, Fla. The Securities and Exchange Commission had charged him with engaging in a sham money market fund transaction to free up funds for his struggling firm.
In April 2011, the U.S. District Court for the Middle District of Florida found Mr. Goble liable for securities fraud, and of aiding and abetting. He was permanently banned from the industry.
Court Rulings
The appeals court upheld the aiding-and-abetting violation and sent the case back to the lower court to reconsider the lifetime bar.
But the circuit court overruled the fraud charge, finding that a deception affecting only an investor's choice of a brokerage firm — not whether to make a particular investment — didn't violate the anti-fraud provisions of the exchange act.
The SEC this month formally asked the court to reconsider the relevant part of its ruling.
In addition, legal observers contend that the appeals court threw up another big hurdle for enforcers when it blasted the SEC's use of broadly written injunctions preventing violators from future misbehavior.
As a result, the SEC may be forced to tailor injunctions, which are used in nearly every case it settles, more narrowly. That could give recidivists more room to commit new frauds.
Eroding Fraud Powers
The SEC contends that the appeals court simply got the law wrong.
In its filing this month, commission lawyers asked the court to remove the offending part of the decision and argued that doing so would not affect the rest of the decision regarding Mr. Goble.
“Misrepresenting a broker-dealer's past performance in order to obtain business is a classic example of conduct that the courts and the commission have recognized violates the anti-fraud provisions,” the SEC said in its filing.
SEC spokesman John Nester declined to comment further about the SEC's appeal.
Industry lawyers aren't surprised that the SEC is pushing back.
“I think the SEC is concerned that there have been some cases recently that have made it harder for them to bring cases,” said Richard Wallace, a partner at Foley & Lardner LLP.
“I think this is an important point for the SEC to make” with the appeals court, he said.
The SEC views “the decision about where to have an account as crucial,” Mr. Wallace said.
Section 10(b) “is the SEC's anti-fraud weapon of choice,” said Thomas Gorman, a partner at Dorsey and Whitney LLP.
“It's really almost absurd for the court to split hairs as finely as it did,” said J. Boyd Page, a senior partner at Page Perry LLC, which represents investors.
If a brokerage firm lies about its capabilities and performance record, “it's inconceivable to me that that is not going to impact every securities transaction I have with that firm,” he said.
But Mr. Gorman agrees with the appeals court's ruling.
The SEC made a “broad claim” under Section 10(b) in the Goble case, and the court reined in the commission, Mr. Gorman said.
“The bottom line is, the case focuses on fraudulent books and records, not defrauding an investor buying or selling a security, which is what Section 10(b) protects,” Mr. Gorman said.
Enforcers have other laws and rules they can use to go after broker-dealers, Mr. Gorman added.
Industry lawyers also are watching what the SEC might have to do to restrict the injunctions it uses with defendants.
So-called obey-the-law injunctions — broad promises made by defendants who settle cases and promise not to violate securities laws in the future — are no longer enforceable in the 11th Circuit, the appeals court said.
“These injunctions … lack specificity and deprive defendants of the procedural protections that would ordinarily accompany a future charge” of a securities law violation, the court wrote in its decision.
“The idea [is that] a person is entitled to full notice about what they can and cannot do,” Mr. Gorman said.
Violating an injunction can result in contempt proceedings, and possibly criminal charges, he said.
But an injunction that is too narrowly drafted “is not worth a whole lot,” Mr. Gorman said.
Specific Injunctions
“In the 11th Circuit, [defendants] are going to insist on more specific injunctions — the SEC will have to deal with it,” Mr. Gorman said.
The SEC is still reviewing that part of the decision, Mr. Nester said.
This isn't the first time that the SEC has been hammered for the way that it settles cases.
Judge Jed Rakoff of the U.S. District Court for the Southern District of New York has lambasted the SEC for settling cases without getting defendants to admit guilt or concede facts.
In March, however, the 2nd U.S. Circuit Court of Appeals in New York supported the SEC's use of such settlements.
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