Gonnella v. U.S. Sec. & Exch. Comm'n

• Decision Date: 02 April 2020
• Docket Number: Docket No. 16-3433,August Term 2019
• Parties: Thomas C. GONNELLA, Petitioner, v. UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

954 F.3d 536

Thomas C. GONNELLA, Petitioner,

v.UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Respondent.

Docket No. 16-3433

August Term 2019

United States Court of Appeals, Second Circuit.

Argued: September 9, 2019

Decided: April 2, 2020

Andrew J. Frisch (Jason D. Wright on the brief), The Law Offices of Andrew J. Frisch, New York, NY, for Petitioner.

Joshua M. Salzman (Mark B. Stern, Mark R. Freeman, Melissa N. Patterson, Megan Barbero, Daniel Aguilar, Tyce R. Walters, on the brief), for William P. Barr, Attorney General, U.S. Department of Justice, Washington, DC, for Respondent.

Paul G. Alvarez, Senior Counsel (Dominick V. Freda on the brief), for Michael A. Conley, Solicitor, Securities and Exchange Commission, Washington, DC, for Respondent.

Before: Wesley, Chin, Sullivan, Circuit Judges

Richard J. Sullivan, Circuit Judge:

Petitioner Thomas C. Gonnella challenges an Opinion and Order of the Securities and Exchange Commission (the "SEC" or "Commission") finding that he violated section 17(a)(1) of the Securities Act of 1933 (the "Securities Act"), section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), and Exchange Act Rules 10b-5(a) and (c), and that he aided and abetted his employer’s violations of its books and records requirements under Exchange Act section 17(a) and Rule 17a-3(a)(2). Specifically, Gonnella argues that (1) the SEC’s designation of an Administrative Law Judge ("ALJ") who was not appointed pursuant to the Appointments Clause violated the Constitution’s separation of powers; (2) the Commission’s use of a cooperating witness violated 5 U.S.C. § 553 and Gonnella’s right to due process; (3) the ALJ impermissibly engaged in independent fact-finding; and (4) the Commission violated due process when it increased the monetary sanctions imposed by the ALJ. Gonnella further argues that there was insufficient evidence to support the Commission’s findings. Because, as explained below, we find that the Commission’s actions were proper and the evidence was sufficient to support the Commission’s findings, we deny the petition for review and affirm the SEC’s order in its entirety.

I. BACKGROUND

Gonnella was a bond trader who specialized in proprietary trading of esoteric asset-backed securities at Barclays, a multinational investment bank and financial services company, from October 2008 until his termination in November 2011.¹ In this role, Gonnella received an annual base salary ranging from $85,000 to $105,000 and annual bonuses of as much as $900,000. Barclays entrusted Gonnella to invest almost $300 million, and he earned the firm profits of about $17 million.

This case stems from a series of trades that Gonnella executed to avoid Barclays’s "aged[-]inventory policy" – a policy designed to "help optimize balance sheet usage through timely turnover of inventory." App’x 437. Pursuant to that policy, traders were penalized for holding securities for more than ninety days. In particular, the firm charged a fee to traders’ books of 0.5% of the market value of these securities. If the trader then sold these securities within seven months, the firm refunded this fee; but after seven months, the fee became final. The policy served as a risk-management tool to help ensure that the securities in traders’ books accurately reflected the market price, and to make sure that traders did not engage in strategies that were inconsistent with the firm’s objectives or applicable regulations.

Gonnella testified that he was aware of Barclays’s policies, including the aged-inventory policy, and that each month he received and reviewed an email that contained information regarding the age of the securities he held as well as any penalties he might face based on the age of these securities. Gonnella further testified that he was aware that Barclays prohibited "parking," defined as "[h]olding or hiding securities in a trading account, customer account, a fictious account[,] or another firm," App’x 456, for "the purpose of concealing the true ownership of the securities, particularly at the end of the reporting period," App’x 678. Gonnella understood that executing "[t]rades that lack[ed] a real shift in ownership risk or benefit" was prohibited. App’x 678. Under Barclays’s aged-inventory policy, any pre-arranged trades had to "be completely documented at the time of the initial transaction," and Barclays’s considered each such transaction to be "presumptively improper." App’x 444.

Gonnella arranged twelve trades with Ryan King, a trader at the now-defunct broker-dealer firm Gleacher, which were designed to avoid the aged-inventory charges. King had little experience with trading securities like this, and the record reflects that Gonnella largely set the terms of the trades. Although Gonnella disputes that he agreed to repurchase the securities after the reporting period, King testified that he was "[i]ncredibly sure" and "didn’t have a doubt" that Gonnella would repurchase these securities at a higher price just days after selling them to him. App’x 104-06. King testified that Gonnella used "coded" language to communicate some of the details of their trades because the trades violated certain financial rules. E.g., App’x 102–03, 119. The record is clear that Gonnella did in fact repurchase these securities from King soon after the deadline for the aged-inventory charges had passed.

Barclays’s trade monitoring system flagged as suspicious four of the five trades Gonnella made with King at the end of August 2011. For each, Gonnella sold securities on August 31 and then repurchased them on September 2, 2011. When an individual from the firm’s compliance department questioned Gonnella, he did not disclose that he traded the securities to avoid the charges. Instead, Gonnella stated that he sold the securities in order to "get more individuals involved in the bonds," which he endeavored to do through Gleacher’s contacts. S. App’x 66–67; see also App’x 393. Gonnella further stated that he repurchased them – at a higher price than he sold them – because he believed he could repackage them and resell them for a higher profit.

King and Gonnella subsequently executed a number of additional trades, even as Gonnella faced increased scrutiny from his supervisor, Matthew Miller. King and Gonnella exchanged numerous messages through Bloomberg terminals about the trades, and later exchanged text messages and phone calls in violation of Barclays’s policy banning the use of personal communication devices to conduct business. When Miller questioned Gonnella about these trades, Gonnella again did not disclose any agreement with King, and instead stated that he thought he could resell the securities at a higher price. Miller warned Gonnella that he would be scrutinizing his trades.

In late 2011, Miller and Gonnella attended Barclays’s annual compliance training, at which the rule against parking was specifically discussed. Soon thereafter, Miller became increasingly suspicious of Gonnella’s trades, and informed Gonnella that he planned to mention them to management. After learning this, Gonnella reported the trades to the compliance department himself, but again did not disclose any agreement with King to repurchase the securities. Barclays subsequently terminated Gonnella, and disclosed the matter to the SEC. In this disclosure, Barclays stated that it did not believe Gonnella violated any securities laws but said that he was not "forthright" during his interview. App'x 690–91.

The Commission initiated administrative proceedings against Gonnella and ordered an ALJ to conduct a hearing. The ALJ found Gonnella violated section 17(a)(1) of the Securities Act, section 10(b) of the Exchange Act, and Exchange Act Rules 10b-5(a) and (c). The ALJ also concluded that Gonnella had aided and abetted Barclays’s violations of the books and records requirements of the Exchange Act and the rules promulgated thereunder. The ALJ then imposed a cease and desist order, a civil penalty of $82,500, and a twelve-month collateral and penny-stock suspension.

Both Gonnella and the SEC’s Enforcement Division petitioned the Commission for review of the ALJ’s decision. In a decision dated August 10, 2016, the Commission concluded, after reviewing the facts and law de novo , that Gonnella violated each of the provisions at issue. The Commission then reassessed the appropriate penalties. Like the ALJ, the Commission ordered a civil penalty of $82,500. Unlike the ALJ, however, it barred Gonnella from working in the securities industry for life, though it permitted him to reapply in five years.

Gonnella appealed to this Court for review on October 11, 2016. Because Gonnella challenged the constitutionality of the ALJ mechanism, this case was stayed pending the Supreme Court’s resolution of Lucia v. SEC , ––– U.S. ––––, 138 S. Ct. 2044, 201 L.Ed.2d 464 (2018).

II. STANDARD OF REVIEW

"The findings of the Commission as to the facts, if supported by substantial evidence, are conclusive." 15 U.S.C. § 78y(a)(4) ; Mathis v. SEC , 671 F.3d 210, 215–16 (2d Cir. 2012). "Under the Administrative Procedure Act, we will set aside the SEC’s actions, findings, or conclusions of law only if they are ‘arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.’ " Mathis , 671 F.3d at 216 (quoting 5 U.S.C. § 706(2)(A) ). "We will not disturb the SEC’s choice of sanction unless it is unwarranted in law or without justification in fact." Id. (internal quotation marks omitted).

III. DISCUSSION

Gonnella raises a number of points in his petition: (1) the Commission violated the Appointments Clause by delegating the matter to an ALJ; (2) the Enforcement Division’s cooperator policy violated the Administrative Procedure Act ("APA") and due process; (3) the ALJ committed improper fact-finding; (4) the Commission’s decision rested on insufficient evidence; and (5) the Commission improperly increased Gonnella’s sanctions. We address each point in turn below.

A....