U.S. Sec. & Exch. Comm'n v. Bocchino (In re Bocchino)

• Decision Date: 23 July 2015
• Docket Number: No. 14–4299.,14–4299.
• Citation: 794 F.3d 376
• Parties: In re Steven S. BOCCHINO, aka Steven Silvio Bocchino aka Steven Bocchino aka Steven S Bocchino, III aka Steven Silvio Bocchino, III aka Steven Bocchino, III, Debtor U.S. Securities and Exchange Commission v. Steven S. Bocchino, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

794 F.3d 376

In re Steven S. BOCCHINO, aka Steven Silvio Bocchino aka Steven Bocchino aka Steven S Bocchino, III aka Steven Silvio Bocchino, III aka Steven Bocchino, III, DebtorU.S. Securities and Exchange Commission

v.Steven S. Bocchino, Appellant.

No. 14–4299.

United States Court of Appeals, Third Circuit.

LAR 34.1(a) June 24, 2015.

Filed: July 23, 2015.

J. Zac Christman, Esq., Newman, Williams, Mishkin, Corveleyn, Wolfe & Fareri, Stroudsburg, PA, for Appellant.

Tracey Hardin, Esq., Josephine T. Morse, Esq., Patricia H. Schrage, Esq., United States Securities & Exchange Commission, Washington, DC, New York, N.Y., for Appellee.

Before: CHAGARES, KRAUSE and VAN ANTWERPEN, Circuit Judges.

OPINION OF THE COURT

VAN ANTWERPEN, Circuit Judge.

Steven S. Bocchino appeals the final decision of the District Court for the Middle District of Pennsylvania affirming the Bankruptcy Court's order of nondischargeability of civil judgment debts pursuant to 11 U.S.C. § 523(a)(2)(A). Bocchino v. SEC, No. 3–14–cv–00662, 2014 WL 4796425 (M.D.Pa. Sept. 26, 2014). For the reasons that follow, we will affirm the decision of the District Court.

I. Factual Background and Procedural History

Bocchino limits his appeal to two discrete legal rulings and does not challenge the Bankruptcy Court's or the District Court's factfinding.¹ Therefore, the following facts are undisputed.

Bocchino worked as a stockbroker. The nondischargeability order at issue relates to civil judgments against Bocchino for two private placement investments he solicited in 1996 while affiliated with a brokerage firm.² The first investment involved an entity known as Traderz Associates Holding, Inc. (“Traderz”). Bocchino learned from a superior that Traderz “might go public” and that the endeavor was supported by “some commitment” from a popular fashion model. In re Bocchino, 504 B.R. 403, 407 (Bankr.M.D.Pa.2013). Based solely on these facts, and without any other independent investigation into the quality of the entity, Bocchino immediately sought investment from clients. Bocchino received over $40,000 in commissions from Traderz sales. The second private placement involved Fargo Holdings, Inc. (“Fargo”). The exact source of Bocchino's information regarding Fargo is unclear. Bocchino claimed that he knew about Fargo from an associate at the brokerage firm. Bocchino also claimed that he initially learned of Fargo by meeting a day trader affiliated with the entity. Nevertheless, Bocchino only obtained cursory documentation about the entity before soliciting sales. He did not conduct any independent investigation into the quality of the investment. This lack of investigation occurred despite Bocchino's awareness that Fargo's principal's “full-time ‘job’ was law student.” In re Bocchino, 504 B.R. at 408. Bocchino received $14,000 in commissions for his clients' stock purchases in Fargo.³

Both Traderz and Fargo turned out to be fraudulent ventures. The principals of each entity were criminally convicted, and the anticipated value of the investments vanished. In the early 2000s, the Securities and Exchange Commission (“SEC”) brought two civil law enforcement actions in the U.S. District Court for the Southern District of New York against those who sold investments in the entities. SEC v. Goldman Lender & Co. Holdings et al., 98–CV–7525 (JGK) (“Goldman Action ”) and SEC v. Nnebe et al., 01–CV–5247 (KMW) ( “Nnebe Action ”). The Goldman Action alleged that Bocchino had violated Section 17(a) of the Securities Act and Sections 10(b) and 15(a) of the Securities Exchange Act for inducing investors via high pressure sales tactics and material misrepresentations. The court entered a default judgment ordering Bocchino to pay $35,090.00 in disgorgement, $14,779.70 in prejudgment interest, and $35,090.00 in civil penalties. Similarly, the Nnebe Action alleged Bocchino violated Sections 5(a), 5(c), and 17(a) of the Securities Act and Sections 10(b), 15(a), and Rule 10b–5 of the Securities Exchange Act. The court entered a default judgment consisting of $14,800.00 in disgorgement, $4,207.85 in prejudgment interest, and $75,000.00 in civil penalties. In total, Bocchino was liable for $178,967.55.

After Bocchino filed for Chapter 13 bankruptcy protection in 2009, the SEC petitioned the Bankruptcy Court for a judgment that the Goldman Action and Nnebe Action judgments were nondischargeable. The SEC argued that the funds were “obtained by ... false pretenses, a false representation, or actual fraud” under 11 U.S.C. § 523(a)(2)(A). After post-trial briefing, the Bankruptcy Court ordered the civil penalties discharged under 11 U.S.C. § 1328(a)(2), but retained the remaining $68,877.55 as nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A).

The Bankruptcy Court recognized that Bocchino believed that his statements to prospective investors were true. Accordingly, it found that “Bocchino did not knowingly make any false statements.” In re Bocchino, 504 B.R. at 405. However, the Bankruptcy Court continued its inquiry into the application of § 523(a)(2)(A). The Bankruptcy Court relied upon In re White, 128 Fed.Appx. 994, 998–99 (4th Cir.2005) (per curiam) (unpublished), for the proposition that the scienter requirement of § 523(a)(2)(A) may be satisfied by grossly reckless behavior. The Bankruptcy Court also reasoned that stockbrokers are akin to fiduciaries and the Restatement (Second) of Torts generally supports a finding of fraudulent misrepresentation for a reckless disregard for the truth. The Bankruptcy Court further noted that the Supreme Court found that grossly reckless conduct satisfied the scienter requirement for defalcation under § 523(a)(4) of the Bankruptcy Act. Bullock v. BankChampaign, N.A., ––– U.S. ––––, 133 S.Ct. 1754, 1757, 185 L.Ed.2d 922 (2013). The Bankruptcy Court described Bocchino's actions as “egregious” and “grossly reckless” in pursuit of his “own greedy purpose, i.e., commissions.” In re Bocchino, 504 B.R. at 408. “Not only was [Bocchino] negligent, but extremely reckless. As an experienced stockbroker, he knew, or should have known, that an independent investigation into the quality of the product he was selling was imperative.” Id. Bocchino appealed. He challenged (1) the Court's application of the grossly reckless standard to satisfy the scienter requirement of § 523(a)(2)(A), and (2) the Court's finding that his actions were the proximate cause of his clients' losses.

On appeal, the District Court affirmed the Bankruptcy Court in its entirety. First, the District Court found that holding grossly reckless behavior nondischargeable under § 523(a)(2)(A) accords with the overall policy goal of the Bankruptcy Act—to limit the opportunity of a fresh start to the “honest but unfortunate debtor.” Bocchino, 2014 WL 4796425, at *2 (quoting Grogan v. Garner, 498 U.S. 279, 286–87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ). The District Court also found Bullock, related Third Circuit cases, and In re White persuasive. In consideration of Bocchino's proximate cause claim, the Court applied general tort law principles to conclude that Bocchino's clients had reasonably relied on his statements as their fiduciary, the investments failed, and the clients suffered losses. The Court reasoned that both the reckless and criminal activities of the principals were substantial factors in the clients' losses, but because the failure of the entities was reasonably foreseeable upon the exercise of due diligence, the crimes were not superseding causes of the losses.

II. Discussion⁴

1. Standard of Review

“Because the District Court sat as an appellate court, reviewing an order of the Bankruptcy Court, our review of the District Court's determinations is plenary.” In re Heritage Highgate, Inc., 679 F.3d 132, 139 (3d Cir.2012) (quoting In re Rashid, 210 F.3d 201, 205 (3d Cir.2000) ).

Therefore, we review the Bankruptcy Court's legal determinations de novo and review its factual determinations for clear error. Id.

2. Scienter

The Bankruptcy Act provides a means for the insolvent to start anew. Grogan, 498 U.S. at 286, 111 S.Ct. 654. The Act limits this opportunity to those debtors who are “honest but unfortunate.” Id. at 286–87, 111 S.Ct. 654. The Act accomplishes this goal by requiring a creditor seeking to prevent a discharge to prove by a preponderance of the evidence that its claim meets one of the statutory exceptions to discharge. Id. at 287, 111 S.Ct. 654. The exceptions are strictly construed. Id. at 286, 111 S.Ct. 654. Section 523(a)(2)(A) of the Act states:

A discharge under section 727, 1141, 1228(a), 1228(b) or 1328(b) of this title does not discharge an individual debtor from any debt ... (2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition....

11 U.S.C. § 523(a)(2)(A). The SEC argues that Bocchino's gross recklessness satisfies the statute's requisite knowledge and intent to deceive. Bocchino responds that the statute requires proof of actual intent to defraud.⁵ Though we implicitly approved of the SEC's position in our consideration of In re Cohen, 185 B.R. 171 (Bankr.D.N.J.1994) (“Cohen I ”), aff'd, 191 B.R. 599, 604 (D.N.J.1996) (“Cohen II ”), aff'd, In re Cohen, 106 F.3d 52 (3d Cir.1997) (“Cohen III ”), aff'd, 523 U.S. 213, 118 S.Ct. 1212, 140 L.Ed.2d 341 (1998), we did not dedicate any substantial treatment to the issue. Therefore, the scienter requirement of § 523(a)(2)(A) remains, largely, an issue of first impression. We conclude that gross recklessness satisfies the scienter requirement of § 523(a)(2)(A).

First, we look to this Circuit's precedent. In Cohen III, we reviewed a district court conclusion that a defendant's misrepresentations about the legal amount of rent that could be charged for an apartment satisfied § 523(a)(2)(A)'s scienter requirement. The petitioner, though well...