Kornman v. S.E.C.

• Decision Date: 15 January 2010
• Docket Number: No. 09-1074.,09-1074.
• Citation: 592 F.3d 173
• Parties: Gary M. KORNMAN, Petitioner v. SECURITIES AND EXCHANGE COMMISSION, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

592 F.3d 173

Gary M. KORNMAN, Petitioner v. SECURITIES AND EXCHANGE COMMISSION, Respondent.

No. 09-1074.

United States Court of Appeals, District of Columbia Circuit.

Argued October 22, 2009.

Decided January 15, 2010.

On Petition for Review of an Order of the Securities & Exchange Commission.

Barry S. Pollack argued the cause and filed the briefs for petitioner. Jeffrey M. Karp entered an appearance.

Dominick V. Freda, Senior Counsel, Securities and Exchange Commission, argued the cause for respondent. With him on the brief was David M. Becker, General

Counsel, Jacob H. Stillman, Solicitor, and Randall W. Quinn, Assistant General Counsel. William K. Shirey II, Counsel, entered an appearance.

Before: ROGERS, GARLAND and KAVANAUGH, Circuit Judges.

Opinion for the Court by Circuit Judge ROGERS.

ROGERS, Circuit Judge:

The Securities and Exchange Commission permanently barred Gary M. Kornman from association with any broker, dealer, or investment adviser pursuant to section 15(b) of the Securities and Exchange Act of 1934 and section 203(f) of the Investment Advisers Act of 1940. Kornman challenges the Commission's decision to bar his association as an investment adviser on two principal grounds: first, there was not substantial evidence in the record to support the finding that he was an investment adviser at the time of the "alleged misconduct," and, second, the Commission abused its discretion by giving inadequate consideration to mitigating factors and to whether lesser sanctions would serve the public interest. The court's review of the Commission's remedial decisions is deferential, see Horning v. SEC, 570 F.3d 337, 343 (D.C.Cir.2009), and we deny the petition.

I.

In December 2006, Kornman was indicted in the Northern District of Texas, on two counts of securities fraud involving alleged insider trading, one count of providing false statements to the Commission, and one count of obstruction of justice. He entered a plea to one count of making a false statement in violation of 18 U.S.C. § 1001, for which he could have been sentenced to five years' imprisonment, followed by three years' supervised release, and ordered to pay a $250,000 fine, to make restitution, and to pay any costs of incarceration and supervision. As part of his plea agreement Kornman stipulated in a Factual Resume that during a telephone conversation with Commission investigators on October 29, 2003, he falsely stated that he did not know who possessed trading authority over the brokerage account for a hedge fund through which he conducted trading activity in publicly traded stock. He further stipulated that he "knew that he personally possessed [that] authority." Factual Resume 2. His stipulation continued: "In addition, the defendant made the statement intentionally, knowing that it was false. Further, the statement was material. Finally, the defendant made the false statement for the purpose of misleading the Securities and Exchange Commission in its investigation into his trading activity." Id.

On July 11, 2007, the district court sentenced Kornman to two years' supervised probation and ordered him to pay a fine of $143,465, the amount the government claimed was unjust enrichment from insider trading, along with a $100 special assessment. The district court dismissed the remaining counts upon motion of the United States.

On July 30, 2007, the Commission instituted administrative proceedings based on three allegations by the Division of Enforcement ("Division").¹ In response, Kornman admitted: he owned an ownership interest in Heritage Security Corporation and was a registered representative of it; he held Series 6 and 63 securities licenses; and he controlled a limited liability company and had participated in trades for "two hedge-type funds." Answer to Corrected Order Instituting Administrative Proceedings ¶ 6. He also admitted pleading guilty to making "a single false statement," and that "a factual resume accompanied his plea agreement, the content of which speaks for itself." Id. at ¶ 8. He denied, however, "any implication that his statement to [the Commission] attorneys [during the October 29, 2003 telephone call] interfered with their investigation or otherwise affected any investor." Id. Additionally, he argued that mitigating factors required rejection in whole or in part of the request for relief and raised various affirmative defenses, including double jeopardy.

The Division moved for summary disposition pursuant to Rule 250 of the Commission's Rules of Practice, 17 C.F.R. § 201.250. It attached eleven exhibits to the motion relating to Kornman's business associations and his criminal conviction.² Citing Commission precedent that summary disposition was well suited to proceedings based on a respondent's criminal conviction,³ particularly in light of Commission precedent "not permit[ting] criminal convictions to be collaterally attacked in its administrative proceedings," Jose P. Zollino, Release No. 308, 2006 WL 507940 at *3 (Mar. 2, 2006), the Division argued that a permanent bar on association should be imposed in light of Kornman's admissions of his association with the Heritage Security Corporation, a broker-dealer, and of his control of Heritage Advisory Group, a limited liability company that managed "two hedge-type funds," and the evidence the hedge funds were in good standing through at least June 9, 2005. The Division argued that the only reasonable conclusion to be drawn from the evidence was that Kornman continued to act as a broker-dealer through the Heritage Security Corporation and as an investment adviser, for compensation, through his association with the Heritage Advisory Group at the time of the October 29, 2003 telephone conversation with Commission investigators when he falsely denied knowing who managed one of the hedge fund portfolios. Consistent with the factors set forth in Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir.1979), the Division argued that in view of his conviction it was in the public interest to impose a permanent bar.

Kornman filed an opposition. He argued that he had a statutory right to a hearing and that discovery was necessary regarding the conduct of the Commission staff involved in the October 29, 2003 telephone call.⁴ He asserted that he was no longer associated with a broker or dealer at the time of his 2007 conviction and that he was no longer acting as or associated with an investment adviser for compensation at the time of the telephone conversation. He also argued, in view of evidence in mitigation, that the Division had failed to show that no lesser sanction than a permanent bar would satisfy the public interest. Kornman attached various documents to his opposition, including a partial transcript of the October 29, 2003 telephone call and letters attesting to his good character.⁵ He also attached his affidavit admitting the underlying conduct, expressing regret for his conduct, accepting "full responsibility for the misconduct during the telephone call," and promising "not [to] repeat anything of the sort in the future," Kornman Aff. ¶¶ 8-15. The Division responded that Kornman's requests for discovery to present mitigating circumstances were irrelevant and sought to relitigate facts previously established in the criminal record, and that his ethical attacks on the Commission investigators were baseless and inaccurate, as evidenced in the complete transcript of the telephone call, which the Division attached as Exhibit 12.⁶

An administrative law judge ("ALJ") granted the Division's motion for summary disposition and permanently barred Kornman from association with any broker-dealer or investment adviser, based on his 2007 conviction for violating 18 U.S.C. § 1001. Gary M. Kornman, Release No. 335, 91 SEC Docket 2234 (Oct. 9, 2007) ("Initial Decision"). The ALJ found the evidence showed that Kornman was associated with Heritage Securities Corporation, a registered broker-dealer from 1992 to October 2006, and that he was associated with the Heritage Advisory Group, a limited liability company that was the general partner of two hedge funds—Heritage Capital Partners I, L.P. and Heritage Capital Opportunities Fund I, L.P. (See supra note 2, Exs. 5A at 10, 17 & 5B at 10, 17.) The ALJ also found that the hedge funds' respective 1998 and 1999 private offering memoranda included provisions for payment of fees for managing the hedge funds' portfolios. (See id., Exs. 5A at 18-19, 5B at 18-19.) Further, the ALJ found that the certificates by the Secretary of the State of Delaware showed the hedge funds were still in existence as of June 2005. (See id., Exs. 2 & 3.) The ALJ noted: "Kornman does not take issue with this material fact. In fact, he avoids doing so by stating obliquely, `Nothing in the record suggests that trades of Heritage Advisory Services in the open market did not cease before the telephone call at issue.' Opposition at 19." Initial Decision at 5 n. 3. The ALJ rejected Kornman's legal defenses, including double jeopardy, and concluded that a permanent bar was required because "Kornman's conviction involved dishonesty and opportunities for dishonesty recur constantly in the securities industry." Id. at 9.

Kornman petitioned for review by the Commission on several grounds, including: (1) he had been denied his statutory right to a hearing because the ALJ had failed to take as true all the facts in his pleadings, specifically his vow not to repeat his misconduct; (2) the ALJ had failed "to review the sufficiency of evidence supposedly reflecting that, at the time of the October 29, 2003, telephone call at issue, Mr. Kornman or any entity with which he was associated was actually `for compensation engage[ing][sic] in the business of advising others' regarding securities investments," Pet. for Review at 3-4; and (3) a permanent bar was inappropriate in view of the evidence in mitigation, including that this was a solitary blemish on his business...