Koch v. Sec. & Exch. Comm'n

• Decision Date: 14 July 2015
• Docket Number: No. 14–1134.,14–1134.
• Parties: Donald L. KOCH and Koch Asset Management, LLC, Petitioners v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

793 F.3d 147

Donald L. KOCH and Koch Asset Management, LLC, Petitioners

v.SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 14–1134.

United States Court of Appeals, District of Columbia Circuit.

Argued April 20, 2015.

Decided July 14, 2015.

Rehearing En Banc Denied Sept. 14, 2015.

Thomas O. Gorman argued the cause for the petitioners.

Dominick V. Freda, Senior Litigation Counsel, Securities and Exchange Commission, argued the cause for the respondent. Michael A. Conley, Deputy General Counsel, John W. Avery, Deputy Solicitor, and Theodore J. Weiman, Senior Counsel, were with him on brief.

Before: HENDERSON and MILLETT, Circuit Judges, and GINSBURG, Senior Circuit Judge.

Opinion

Opinion for the Court filed by Circuit Judge HENDERSON.

KAREN LeCRAFT HENDERSON, Circuit Judge:

The main purpose of the stock market is to make fools of as many men as possible.

—Bernard M. Baruch

As an investment adviser, Donald Koch purchased stock from three small banks and made trades to increase the price of those shares immediately before the daily close of the stock market. This piqued the market-manipulation antennae of the Securities and Exchange Commission (SEC or Commission). The SEC investigated Koch and his company, Koch Asset Management (KAM), and eventually charged them both with marking the close. Marking the close is investor argot for buying or selling stock as the trading day ends to artificially inflate the stock's value. See Black v. Finantra Capital, Inc., 418 F.3d 203, 206 (2d Cir.2005). The SEC found that Koch and KAM repeatedly marked the close and sanctioned them accordingly. Although we agree with the Commission's order in large part, one of the SEC's sanctions is impermissibly retroactive and requires us to grant the petition in part and vacate the order in part.

I. BACKGROUND

A.Securities Legislation

The Securities and Exchange Act of 1934 (Exchange Act) “was intended principally to protect investors against manipulation of stock prices through regulation of transactions upon securities exchanges.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 195, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). To accomplish this goal, the Exchange Act makes it unlawful for “any person,” in connection with the purchase or sale of securities, “[t]o use or employ ... any manipulative or deceptive device or contrivance in contravention of [SEC] rules.” 15 U.S.C. § 78j(b). The Commission's regulations, in turn, make it unlawful for “any person,” in connection with the purchase or sale of securities, “[t]o employ any device, scheme, or artifice to defraud” or “[t]o engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.” 17 C.F.R. § 240.10b–5(a), (c).

The Investment Advisers Act of 1940 (Advisers Act) proscribes nearly identical conduct. The Act makes it unlawful for “any investment adviser” to “employ any device, scheme, or artifice to defraud any client or prospective client” or to “engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative.” 15 U.S.C. § 80b–6(1), (4). To implement these prohibitions, the SEC requires investment advisers to “[a]dopt and implement written policies and procedures reasonably designed to prevent violation[s]” of the Advisers Act. 17 C.F.R. § 275.206(4)–7(a).

Like the crash in 1929, the wreckage wrought by the Great Recession of 2008 produced calls for reform, ultimately resulting in the Dodd—Frank Wall Street Reform and Consumer Protection Act (Dodd—Frank Act), Pub.L. No. 111–203, 124 Stat. 1376 (2010). Before the Dodd—Frank Act, the SEC could bar individuals who violated either the Exchange Act or the Advisers Act from associating with various people in the securities world, including stock brokers, dealers and investment advisers. See 15 U.S.C. § 78o (b)(4)(F) (2006) (Exchange Act violator may be barred from “associat[ing] with a broker or dealer”); id. § 80b–3(f) (2006) (Advisers Act violator may be barred from “associat[ing] with an investment adviser”). The Dodd—Frank Act expanded this power. Now, the Commission may also bar violators from associating with municipal advisors or “nationally recognized statistical rating organizations” (rating organizations). See Dodd—Frank Act § 925(a). The SEC's enlarged authority created remedies that were “not previously available under the securities laws” before the Dodd—Frank Act. John W. Lawton, Advisers Act Release No. 3513, 2012 WL 6208750, at *5 (Dec. 13, 2012).

B.The Facts

Koch founded KAM in 1992 and was its sole investment adviser, owner and principal. Koch's investment strategy was to buy stock from small community banks as long-term investments. KAM used Huntleigh Securities Corporation, a registered broker-dealer, to execute trades and maintain client accounts. Although Catherine Marshall was Huntleigh's agent assigned to handle KAM's, and Koch's, business, Koch contacted a trader at Huntleigh's trading desk directly when he wanted to make a trade. As of September 2009, Koch's contact at Huntleigh's trading desk was Jeffrey Christanell.

In the wake of the 2008 market crash, Koch's clients became increasingly worried that their investments would decline in value. Around the same time, Huntleigh began allowing account holders, like Koch's clients, to access their account information online. This frustrated Koch because he wanted his clients to get investment information from him , not a website. He also worried that his clients would be concerned if their online account information suggested that their accounts were underperforming. To ensure that his clients' accounts appeared to retain their value, Koch allegedly marked the close between September and December 2009 for three small bank stocks: High Country Bancorp, Inc.; Cheviot Financial Institution; and Carver Bancorp, Inc.

Koch's conduct aroused suspicions. A New York Stock Exchange Arca investigator sent a letter to Huntleigh to Marshall's attention regarding Koch's trading. The letter specifically asked Huntleigh to provide information on its policies and procedures for preventing traders from marking the close. After receiving the letter, Marshall asked Koch whether he had marked the close. Koch denied the allegations and said, among other things, that he was simply trying to get rid of some excess cash in a client's account. Huntleigh evidently did not buy this explanation, as it subsequently fired Christanell for violating its trading policies and terminated its relationship with KAM.

The SEC then launched an investigation into Koch's trading activity. In April 2011, it instituted proceedings against KAM and Koch, charging both as primary violators under the Exchange Act, the Advisers Act and their respective implementing regulations. A hearing before an administrative law judge (ALJ) followed. The ALJ found that Koch illegally marked the close for High Country stock on September 30 and December 31, and for Cheviot and Carver stock on December 31. The ALJ also found that Koch violated the Advisers Act regulations by failing to follow KAM's policies and procedures designed to prevent Advisers Act violations. Koch and KAM appealed the ALJ's decision to the Commission.

The Commission affirmed the ALJ's decision in a 37–page opinion. It reviewed a series of telephone conversations, emails and other information related to Koch's trading activity. It found “compelling” evidence that Koch intended to manipulate the trading price for all three bank stocks by marking the close on September 30 and December 31. Donald Koch & Koch Asset Management, LLC, Exchange Act Release No. 72179, 2014 WL 1998524, at *10 (May 16, 2014) (Order ). It also determined that the expert testimony Koch presented to the ALJ was unreliable and that Koch's innocent explanations for his trading activity failed to hold water. The Commission ultimately issued five remedial orders to enforce its decision; the one principally relevant here is its order barring Koch from associating with “any investment adviser, broker, dealer, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization.” Id. at *25. Koch timely petitioned this Court for review. We have jurisdiction pursuant to 15 U.S.C. §§ 78y(a), 80b–13(a).

II. ANALYSIS

Our standard of review is familiar: The Commission's findings of fact “if supported by substantial evidence” are “conclusive.” Id. §§ 78y(a)(4), 80b–13(a). Substantial evidence “does not mean a large or considerable amount of evidence, but rather such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.” Pierce v. Underwood, 487 U.S. 552, 565, 108 S.Ct. 2541, 101 L.Ed.2d 490 (1988) (quotation marks omitted). The Commission's “other conclusions may be set aside only if arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”Graham v. SEC, 222 F.3d 994, 999–1000 (D.C.Cir.2000) (citing 5 U.S.C. § 706(2)(A) ) (quotation marks omitted). Additionally, we “accord great deference to the SEC's remedial decisions” and will not disturb them unless they are “unwarranted in law or without justification in fact.” Horning v. SEC, 570 F.3d 337, 343 (D.C.Cir.2009) (alterations omitted).

Koch presses three arguments on appeal. First, he argues that the SEC's factual findings were not supported by substantial evidence and that its legal conclusions misread the governing statutes. Second, he claims that the Commission erred in charging Koch as a primary violator under both the Exchange Act and the Advisers Act. And third, he contends that the Commission's order barring him from associating with municipal advisors or rating organizations is impermissibly retroactive. We take each argument in turn.

A.Application of Law & Sufficiency of Evidence

Koch's primary argument on appeal is that the Commission's decision applied the wrong legal standard and is not supported by substantial evidence. We think the contrary is true: The Commission...