Bradbury v. S.E.C.
| Decision Date | 11 January 2008 |
| Docket Number | No. 06-1319.,06-1319. |
| Citation | 512 F.3d 634 |
| Parties | Dolphin and BRADBURY, Incorporated and Robert J. Bradbury, Petitioners v. SECURITIES AND EXCHANGE COMMISSION, Respondent. |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Philip G. Kircher argued the cause and filed the briefs for petitioners.
Rada Lynn Potts, Senior Litigation Counsel, Securities & Exchange Commission, argued the cause for respondent. With her on the brief were Brian G. Cartwright, General Counsel, Andrew N. Vollmer, Deputy General Counsel, and Jacob H. Stillman, Solicitor.
Before: GINSBURG, Chief Judge, and BROWN and GRIFFITH, Circuit Judges.
Opinion for the court filed by Circuit Judge BROWN.
Dolphin & Bradbury, Inc. and Robert J. Bradbury petition for review of a Securities and Exchange. Commission order holding them liable for violations of multiple securities laws. Petitioners claim they lacked the requisite intent. We disagree and deny the petition for review.
Petitioner Dolphin & Bradbury, Inc., a registered broker-dealer, served as underwriter for the municipal bonds issued by the Dauphin County General Authority (DCGA) to finance the purchase of Forum Place, an office building in. Harrisburg, Pennsylvania. Petitioner Robert J. Bradbury is the chairman, chief executive, officer, chief operating officer, and 38% owner of Dolphin & Bradbury.1
When the bonds were offered in July 1998, the Pennsylvania Department of Transportation (PennDOT) occupied a substantial portion of Forum Place.2 PennDOT's lease was scheduled to (and did) expire in November 2001—well before the bonds' maturity dates, which ranged from 2003 to 2025. PennDOT leased this space because of environmental problems and fire damage to its own building, but planned to move once its building was renovated or replaced. Bradbury believed the move would probably occur around 2001 or 2002.3 The key participants— Bradbury (underwriter), O'Neill (underwriter's counsel), Fowler (DCGA's financial advisor), and Sweet (DCGA's bond counsel)—all had extensive municipal bond experience, and all except O'Neill knew the PennDOT information.
On June 30, 1998, in the run-up to the bond offering, the Secretary of the Department of General Services told Fowler and Sweet he expected the state government to use Forum Place as temporary "swing space" for other state employees after PennDOT moved, but he made no commitments or guarantees. Fowler and Sweet informed Bradbury. On July 8, 1998, DCGA voted to proceed with the bond offering and Forum Place acquisition. PennDOT's plans were discussed at this DCGA meeting, which Bradbury did not attend.
Despite the critical importance of PennDOT's planned departure, Bradbury generally failed to disclose this information to prospective investors.4 Instead, he attempted to assure them about Forum Place's future by referring to the state government's swing space needs. The Official Statement—the key disclosure document —included some disclaimers and cautionary language, but it did not disclose that PennDOT actually planned to leave Forum Place. Moreover, financial projections prepared by Fowler, reviewed by Bradbury, and provided to investors assumed the Forum Place leases would continue at the same lease rates until at least 2008.
When the Forum Place transaction closed on July 31, 1998, PennDOT's old building had not been demolished and site preparation for the new building had not yet begun. However, just one day later, PennDOT's old building was imploded. Construction began on the new PennDOT building. In late 2000, PennDOT vacated most of its Forum Place space, but continued to pay rent until its lease expired in November 2001. By December, 55% of Forum Place lay vacant, and bondholders forced Forum Place into receivership in 2003.
The ALJ and the Commission found Bradbury violated various securities laws and regulations by failing to disclose the central fact of PennDOT's planned departure. Bradbury challenges the Commission's finding that he acted with scienter.
The Commission found Bradbury violated section 17(a) of the Securities Act of 1933 (Securities Act), 15 U.S.C. § 77q(a), as well as section 10(b) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5. We have subject matter jurisdiction to review the Commission's order pursuant to a "direct-review statute," namely, section 9 of the Securities Act and section 25 of the Exchange Act. See Watts v. SEC, 482 F.3d 501, 505 (D.C.Cir.2007) (discussing 15 U.S.C. §§ 77i(a), 78y(a)(1)).
"The antifraud provisions of the federal securities laws prohibit fraudulent or deceptive practices in the offer and sale of municipal securities." Disclosure Obligations, Securities Act Release No. 7049, Exchange Act Release No. 33,741, 56 SEC Docket 479 (Mar. 9, 1994), 1994 WL 73628, at *5. Rule 10b-5 renders it unlawful for someone in Bradbury's position "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5. In this context, an omitted fact is material if a "reasonable investor" would have viewed it as "significantly alter[ing] the total mix of information made available." Disclosure Obligations, 1994 WL 73628, at *5 (brackets omitted) (quoting TSC Indus. v. Northway, Inc., 426 U.S. 438, 449, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976)).
Bradbury only disputes whether he acted with scienter, see SEC v. Steadman, 967 F.2d 636, 641 (D.C.Cir.1992), which is a factual determination.5 See Howard v. SEC, 376 F.3d 1136, 1149 (D.C.Cir.2004); Graham v. SEC, 222 F.3d 994, 1005 (D.C.Cir.2000). Section 17(a)(1) of the Securities Act, section 10(b) of the Exchange Act, and Rule 10b-5 require proof of scienter. See Aaron v. SEC, 446 U.S. 680, 697, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976).
To prove Bradbury acted with scienter, the SEC must establish "`an intent to deceive, manipulate, or defraud.'" Steadman, 967 F.2d at 641 (quoting Aaron, 446 U.S. at 686 n. 5, 100 S.Ct. 1945). "[E]xtrerne recklessness" can satisfy this scienter requirement. Id. Extreme recklessness "is not merely a heightened form of ordinary negligence," id., and does not involve a "should have known" standard, see id. at 641-42. Rather, "it is an `extreme departure from the standards of ordinary care . . . which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.'" Id. (emphasis added) (quoting Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir.1977)). It is, in fact, "`a lesser form of intent,'" id. at 642, implying the danger was so obvious that the actor was aware of it and consciously disregarded it.
The Commission's finding that Bradbury acted with scienter is conclusive if, under our "very deferential" substantial evidence standard, Nat'l Ass'n of Sec. Dealers v. SEC, 801 F.2d 1415, 1419 (D.C.Cir.1986), "a reasonable mind might accept [the] evidentiary record as adequate to support [the Commission's] conclusion," Dickinson v. Zurko, 527 U.S. 150, 162, 119 S.Ct. 1816, 144 L.Ed.2d 143 (1999) (quotation marks omitted). See Graham, 222 F.3d at 999 (citing 15 U.S.C. § 78y(a)(4)). Because the notion of extreme recklessness "belies the existence of a bright line test for when the scienter threshold has been crossed," 3 THOMAS LEE HAZEN, THE LAW OF SECURITIES REGULATION § 12.8[3] (5th ed.2005), this case requires, a fact-intensive inquiry.
Bradbury contends the Commission's scienter finding is not supported by substantial evidence. We disagree. First, Bradbury did not disclose PennDOT's actual plans to move out of Forum Place. Second, he tries to hide his extreme recklessness by misstating the role of an underwriter. We address each point in turn.
(1)
PennDOT's lease was crucial because PennDOT occupied 79% of Forum Place and generated 60% of its lease revenues,6 and the bonds' tax-exempt status depended on continuing occupancy by public agencies such as PennDOT. Bradbury claims he adequately disclosed the risks of PennDOT leaving Forum Place. He points to cautionary statements in the offering documents to show he did not act recklessly. Most significantly, the Official Statement warned, in boldface capital letters: "The office leases are scheduled to expire prior to the maturity of the 1998 bonds; there is no commitment, requirement, or guarantee that the Commonwealth [of Pennsylvania] will renew or extend any of the office leases." It also disclosed the square footage and lease rate of the PennDOT lease and explained "[t]he 1998 Bonds are limited obligations of the Authority and are secured by and payable solely from the revenues derived from lease payments and [facilities] fees."7
But substantial evidence supports the Commission's conclusion that Bradbury's cautionary statements were so deficient he must have known investors would be misled by the offering documents. The Commission noted the critical distinction between disclosing the risk a future event might occur and disclosing actual knowledge the event will occur. Bradbury's cautionary language only disclosed a risk that tenants might leave Forum Place— not his knowledge that PennDOT actually planned to do so in the near future. Bradbury also argues his discussions with investors about the state government's swing space needs show he did not act with scienter. However, this argument again misses the point: discussing swing space only implies that a tenant might leave Forum Place—not that the largest tenant actually had plans to leave.
Bradbury's "[c]autionary words about future risk cannot insulate from liability the...
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