United States v. Behrens

• Decision Date: 17 July 2013
• Docket Number: No. 11–3482.,11–3482.
• Parties: UNITED STATES of America, Plaintiff–Appellee, v. Bryan S. BEHRENS, Defendant–Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

713 F.3d 926

UNITED STATES of America, Plaintiff–Appellee,

v.Bryan S. BEHRENS, Defendant–Appellant.

No. 11–3482.

United States Court of Appeals, Eighth Circuit.

Submitted: Jan. 15, 2013.

Filed: April 25, 2013.

Rehearing and Rehearing En Banc Denied July 17, 2013.

David R. Stickman, FPD, argued, Omaha, NE, for appellant.

Russell X. Mayer, USA, argued, Omaha, NE, for appellee.

Before RILEY, Chief Judge, COLLOTON and GRUENDER, Circuit Judges.

GRUENDER, Circuit Judge.

Bryan Behrens pled guilty to one count of securities fraud in violation of 15 U.S.C. §§ 78j(b), 78ff and 17 C.F.R. § 240.10b–5 (“Rule 10b–5”). The district court ¹ sentenced Behrens to five years' imprisonment, three years of supervised release, and restitution in the amount of $6,841,921.90. Behrens appeals his sentence, arguing that because he had no knowledge his conduct violated Rule 10b–5, imprisonment is not a permissible sentencing option. We affirm the district court's sentence.

I.

Behrens owned and operated 21st Century Financial Group, Inc., a life insurance agency and financial investment advising business. He later expanded his business dealings by becoming the sole owner and operator of National Investments, Inc. (“NII”). Behrens promoted NII to his clients as a safe and lucrative investment opportunity. In exchange for their loans to NII, Behrens issued the investors promissorynotes, which indicated the bearer would receive a seven to nine percent fixed rate of return. However, Behrens did not invest NII's funds in real estate as promised. Instead, he effectuated a Ponzi scheme, using investor funds to prop up his other business interests and support his profligate spending habits. After an SEC investigation, a federal grand jury returned a twenty-one-count indictment in April 2009.

Behrens and the Government reached a plea agreement, but it did not include a provision regarding Behrens's final sentence. The presentence investigation report calculated the advisory guidelines imprisonment range as 121–151 months. At the sentencing hearing, Behrens argued he was ineligible for imprisonment under § 78ff(a)'s “no knowledge” defense. Section 78ff(a) imposes criminal liability for “[w]illful violations” of securities laws or SEC rules or regulations but allows defendants who prove they had “no knowledge” of the rule or regulation they violated to avoid imprisonment:

Any person who willfully violates any provision of this chapter ... or any rule or regulation thereunder ... shall upon conviction be fined not more than $5,000,000, or imprisoned not more than 20 years ... but no person shall be subject to imprisonment under this section for the violation of any rule or regulation if he proves that he had no knowledge of such rule or regulation.

The district court initially ruled that the “no knowledge” defense applies only to those convicted of violating SEC rules, rather than securities statutes, and because Behrens had pled guilty to violating the latter (§ 78j(b)), he accordingly could not take advantage of the “no-knowledge” provision. We vacated the district court's imposition of sixty months' imprisonment, holding that individuals who are charged with violating both § 78j(b) and Rule 10b–5 are still “entitled to assert the no-knowledge defense to imprisonment at sentencing” because one of the elements of the conduct proscribed by § 78j(b) is the violation of an SEC rule or regulation. ²United States v. Behrens, 644 F.3d 754, 757 (8th Cir.2011). We noted that Behrens bore the “burden of showing no knowledge” and remanded the matter to the district court for consideration of that question in the first instance. Id.

On remand, the district court imposed the same sentence. The court found that, because Behrens “was aware of the verbatim provisions of Rule 10b–5 and that they proscribed illegal conduct,” he could not meet his burden of proving he had no knowledge of Rule 10b–5. On appeal, Behrens argues that even if he was aware of the provisions of Rule 10b–5 as they relate to securities, he can still obtain shelter under the “no knowledge” defense if he can show that he did not know the promissory notes he issued through NII constituted securities within the scope of Rule 10b–5. In effect, Behrens insists he had “no knowledge” of Rule 10b–5 because he was ignorant of its applicability to his conduct. The Government, in contrast, interprets the no-knowledge provision as allowing Behrens to avoid prison only if he can show by a preponderance of the evidence that he was unaware of Rule 10b–5's very existence.

II.

“As with any question of statutory interpretation, our analysis begins with the plain language of the statute.” Behrens, 644 F.3d at 755 (quoting United States v. Jeanpierre, 636 F.3d 416, 425 (8th Cir.2011)). The level of knowledge referenced in § 78ff(a)'s “no knowledge” defense to imprisonment is a matter of first impression for us, but we do not approach this topic upon a blank slate. “Statutory language must be read in context and a phrase ‘gathers meaning from the words around it.’ ” Jones v. United States, 527 U.S. 373, 389, 119 S.Ct. 2090, 144 L.Ed.2d 370 (1999) (quoting Jarecki v. G.D. Searle & Co., 367 U.S. 303, 307, 81 S.Ct. 1579, 6 L.Ed.2d 859 (1961)). Section 78ff(a) first makes imprisonment a possibility for “[a]ny person who willfully violates” an SEC rule or regulation but then carves out a safe harbor for those with “no knowledge of such rule or regulation.” We have interpreted “willfully violates” in this context as requiring proof of “the intentional doing of the wrongful acts,” but not as requiring proof that the defendant knew of a particular securities law or SEC rule prohibiting his actions. United States v. O'Hagan, 139 F.3d 641, 647 (8th Cir.1998); accord United States v. Tarallo, 380 F.3d 1174, 1187 & n. 3 (9th Cir.2004). “A person can willfully violate an SEC rule even if he does not know of its existence,” so long as “the act be wrongful under the securities laws” and “the knowingly wrongful act involve a significant risk of effecting the violation that has occurred.” United States v. Peltz, 433 F.2d 48, 54–55 (2d Cir.1970). In order for it to be meaningful, then, the “no knowledge” defense must offer at least some but not all of these willful violators the added protection of avoiding imprisonment. Cf. Ratzlaf v. United States, 510 U.S. 135, 140–41, 114 S.Ct. 655, 126 L.Ed.2d 615 (1994) (describing how judges should “hesitate” to treat statutory terms as surplusage). The question before us concerns the precise scope of this subset.

There is some initial appeal to the Government's plain meaning interpretation of “no knowledge of such rule or regulation” as requiring a complete absence of knowledge of the pertinent SEC rule or regulation; in other words, no knowledge of its very existence. However, language from the Supreme Court's opinion in United States v. O'Hagan, 521 U.S. 642, 117 S.Ct. 2199, 138 L.Ed.2d 724 (1997), indicates we should read the no-knowledge provision more broadly. O'Hagan involved whether trading on misappropriated information violated Rule 10b–5 because it constituted “deceptive” conduct “in connection with” securities transactions. Id. at 653, 117 S.Ct. 2199. After concluding that such conduct did violate Rule 10b–5 and therefore could lead to criminal liability under § 78ff(a), the O'Hagan Court characterized the “no knowledge” defense as one of two “sturdy safeguards Congress has provided regarding scienter” for criminal convictions for securities fraud. Id. at 665, 117 S.Ct. 2199. If the “no knowledge” defense to imprisonment were available only to those who deal in securities with a complete lack of awareness of the existence of an SEC rule or regulation, it would hardly be a “sturdy safeguard[ ] ... regarding scienter.” As a result, “no knowledge” cannot be limited, as the Government urges, to no knowledge of the existence of the pertinent SEC rule or regulation.

At the same time, there is little support for Behrens's highly specific interpretation of “no knowledge” as no knowledge that one's conduct actually violates the particular SEC rule he is convicted of transgressing. The meaning of “willfully violates” in § 78ff(a) is consistent with the traditional principle that “ignorance of the law is no excuse.” Bryan v. United States, 524 U.S. 184, 193–96, 118 S.Ct. 1939, 141 L.Ed.2d 197 (1998) (rejecting petitioner's proposed definition of the willfulness requirement in 18 U.S.C. § 924(1)(D) as creating an exception to this traditional rule by “requir[ing] knowledge of the law”). The “no knowledge” defense, by requiring some level of regulatory awareness, undeniably departs from this traditional rule; the only question is how broadly the exception sweeps. We will not “interpolate words into a statute when the Congress has not seen fit to use such words itself.” Ark. Valley Indus., Inc. v. Freeman, 415 F.2d 713, 718 (8th Cir.1969). Section 78ff(a) does not say that defendants can avoid imprisonment if they can prove they had no knowledge that their conduct actually violated the pertinent SEC rule or regulation. If Congress so intended, it could have chosen to say, for example, that no person shall be imprisoned “if he proves that he had no knowledge he was violating such rule or regulation.” Instead, § 78ff(a) simply speaks of “no knowledge of such rule or regulation.” Therefore, we believe the better reading of the no-knowledge provision is to allow individuals to avoid a sentence of imprisonment if they can establish that they did not know the substance of the SEC rule or regulation they allegedly violated, regardless of whether they understood its particular application to their conduct.

Our interpretation accords with the majority of other courts to have addressed the issue. The Ninth Circuit has reviewed a similar challenge to the mens rea required under the “no knowledge” defense. United States v. Reyes, 577 F.3d 1069, 1080–82 (9th Cir.2009). After concluding...