The Tenth Circuit’s recent decision in ACAP Financial, Inc. v. SEC, No. 13-9592 (10th Cir. Apr. 3, 2015), should have been a straightforward victory for FINRA and the SEC. Instead, the court seemed peculiarly reticent about denying the relief requested. It emphasized the narrow grounds asserted in support of the petition for relief from the administrative sanctions, and ultimately denied the relief, in its own words, because it was “unable to discern any basis on which we might deem the agency’s decision impermissible under the standards of review that cabin our involvement in this case.” Slip op. at 12. The opinion is notable for its unusually provocative asides about issues not raised in the petition for review, along with comments that these would present “meaty” issues if only the petitioners had raised them. A copy of the decision is available here: ACAP Financial, Inc. v. SEC.
The case was not an appealing one for the petitioners, a penny stock brokerage firm and its head trader and compliance manager. They were sanctioned by FINRA for allowing sales of unregistered stock from accounts maintained at ACAP by fraudsters engaged in hyping a shell company and cashing out in a pump and dump scheme. The SEC reviewed and approved the sanctions imposed. The petitioners did not contest the violations, but challenged the propriety of the remedies imposed — a $100,000 fine for the firm, and a $25,000 fine and six-month suspension for the individual. They argued that FINRA guidelines supported the sanctions imposed only in “egregious” cases, and, under SEC precedent, “egregious” conduct requires intentional or knowing violation of a regulatory duty, or a breach of fiduciary duty, which they contended had not occurred.
The court found the argument failed because the premise was wrong — the petitioners could not show any such prior SEC precedent. But in doing so, the court emphasized that because the petitioners did not raise other potentially viable issues, it could not reach them. Among those issues were:
- Whether the SEC applied an altered remedial policy to the case without adequate explanation, which could support a claim of “arbitrary and capricious” decision-making. Slip op. at 4 (“It’s an argument that sounds promising on first encounter. After all, courts routinely fault agencies for ‘arbitrary and capricious’ decisionmaking when they change an administrative policy without explanation.”).
- Whether the SEC failed to provide sufficient content to the term “egregious,” when “close cousins in the law’s large clan of vituperative epithets (‘wanton,’ ‘wicked,’ and ‘gross’ come quickly to mind) have proven anything but self-defining.” Id. at 6 (citing “Steamboat New World King, 57 U.S. (16 How.) 469, 474 (1853); Daniels v. Williams, 474 U.S. 327, 334 (1986); Wilson v. Brett, (1843) 152 Eng. Rep. 737 (Exch.) 739 (opinion of Rolfe, J.)”). This could “leav[e] members of the securities industry without fair warning about when their conduct might invite the epithet’s application.” Id.
- Whether the SEC used this particular proceeding “to expand its definition of the term ‘egregious’ beyond intentional and knowing misconduct and breaches of fiduciary duties and then apply its newly expanded definition retroactively,” which the court termed “a species of argument with a long provenance of its own.” Id. at 6-7 (citing “SEC v. Chenery Corp., 332 U.S. 194, 216-17 (1947) (Jackson, J., dissenting); Henry J. Friendly, The Federal Administrative Agencies: The Need for Better Definition of Standards, 75 Harv. L. Rev. 863, 867 (1962); Stewart Capital Corp. v. Andrus, 701 F.2d 846, 848 (10th Cir. 1983) (identifying circumstances in which retroactive agency adjudication can be an abuse of discretion)”).
But because the petitioners made it clear they were not pursuing any of these arguments, the court was “left with no occasion to pass on any of the meatier arguments we imagined might be before us.” Id. at 7. And elsewhere the court says: “[petitioners] present us only with a narrow challenge, disputing whether the SEC offered a reasoned explanation for its decision to reject their … arguments. At least that much the agency did.” Id. at 9.
This certainly makes it sound like this was a court that would give serious consideration to challenges of SEC sanctions on the grounds not pursued by the petitioners in this case. Is the Tenth Circuit ready to take on excessively vague SEC sanction policies, or the SEC’s common practice of law-making by enforcement — creating legal policies in enforcement actions after the fact, rather than by means of an orderly, forward-looking regulatory process? Only the future will tell. But it sure does sound like some Tenth Circuit judges were frustrated that those “meaty arguments” were not presented. Why else make a point of issues that might have been, but were not, raised? Why else take the trouble to cite materials addressing issues not presented on appeal (including an 1843 English case!)? And why else conclude the opinion with the statement: “No doubt the open-ended nature of the multi-factor balancing tests the SEC uses when setting sanctions could be attacked on a variety of potential grounds. But the petitioners before us have repeatedly demurred when presented with the opportunity to challenge the propriety of the SEC’s decisionmaking processes, asking us only to decide much narrower questions — such as the consistency of the results reached here with those in earlier cases. And when it comes to those narrower questions, we are unable to discern any basis on which we might deem the agency’s decision impermissible under the standards of review that cabin our involvement in this case.” Slip op. at 12.
This was a pedestrian case that the court turned into a commentary on possible regulatory flaws in SEC policy-making and enforcement practices. Although the petition for review was denied, I would not take that as a ringing endorsement that the noted SEC policies or practices are safe from challenge under an “arbitrary and capricious” standard.
April 6, 2015
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