16-3433 Gonnella v. Securities and Exchange Commission
In the United States Court of Appeals For the Second Circuit ______________
AUGUST TERM 2019
(Argued: September 9, 2019 Decided: April 2, 2020)
Docket No. 16-3433
______________
THOMAS C. GONNELLA,
Petitioner,
v.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION,
Respondent.
Before: WESLEY, CHIN, SULLIVAN, Circuit Judges
______________ Petitioner Thomas C. Gonnella challenges a decision of the Securities and Exchange Commission (the “Commission”) finding that he violated section 17(a)(1) of the Securities Act of 1933, section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rules 10b-5(a) and (c) promulgated thereunder, and that he aided and abetted his employer’s violations of its books and records requirements under the Exchange Act and associated regulations. Gonnella argues that the Commission committed a number of constitutional and statutory violations, and that the evidence was insufficient to support the Commission’s findings. We disagree. Accordingly, we AFFIRM. ______________
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.
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”),
2 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
3 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.
1 The Exchange Act defines asset-backed securities as “a fixed-income or other security collateralized by any type of self-
liquidating financial asset (including a loan, a lease, a mortgage, or a secured or unsecured receivable) that allows the holder of the security to receive payments that depend primarily on cash flow from the asset.” 15 U.S.C. § 78c(a)(79)(A). Esoteric asset-backed securities are complex securities with a small market of buyers, which are usually backed by unusual assets such as timeshare rentals, shipping containers, and entertainment royalties. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), banking entities like Barclays are now prohibited from engaging in proprietary trading. Pub. L. No. 111-203, § 619, 124 Stat. 1376, 1620–31 (2010); 17 C.F.R. § 255.3 (implementing Section 619 of the Dodd-Frank Act).
4 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
5 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.
6 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
7 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.
8 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, 138 S. Ct. 2044
(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
9 Commission’s decision rested on insufficient evidence; and (5) the Commission
improperly increased Gonnella’s sanctions. We address each point in turn below.
A. Gonnella Forfeited His Constitutional Challenge by Not Raising It During the Administrative Proceedings Gonnella first challenges the Commission’s order on the ground that the
Commission violated the Appointments Clause of Article II of the Constitution
when it designated the case to an ALJ. In June 2018, while this appeal was
pending, the Supreme Court confirmed that ALJs employed by the SEC are
inferior officers who must be appointed in accordance with the Appointments
Clause. Lucia, 138 S. Ct. 2053–54. Today, we are asked to decide whether a litigant
may challenge the constitutionality of the ALJ’s appointment for the first time on
appeal.
“[O]rderly procedure and good administration require that objections to the
proceedings of an administrative agency be made while [the agency] has
opportunity for correction in order to raise issues reviewable by the courts.”
United States v. L.A. Tucker Truck Lines, Inc., 344 U.S. 33, 36−37 (1952).
Constitutional claims are no different. See Freytag v. Comm’r, 501 U.S. 868, 893
(1991) (Scalia, J., concurring in part and concurring in the judgment)
(“Appointments Clause claims, and other structural constitutional claims, have no
10 special entitlement to review.”). “No procedural principle is more familiar to this
Court than that a constitutional right may be forfeited . . . by the failure to make
timely assertion of the right before a tribunal having jurisdiction to determine it.”
Yakus v. United States, 321 U.S. 414, 444 (1944). While the Supreme Court in Freytag
recognized there may be “rare cases” in which a petitioner may raise an objection
on appeal that was not raised to the administrative body, Freytag, 501 U.S. at 879,
it “neither accept[ed] nor reject[ed]” the petitioners’ proposal to “adopt[] a general
rule that ‘structural’ constitutional rights as a class simply cannot be forfeited,” id.
at 893 (Scalia, J., concurring in part and concurring in the judgment). 2
Four years after Freytag, the Supreme Court indicated that an Appointments
Clause challenge must generally be “timely” to be considered on appeal. See Ryder
v. United States, 515 U.S. 177, 182–83 (1995). The Supreme Court recently
emphasized this again in Lucia, stating that “‘one who makes a timely challenge to
the constitutional validity of the appointment of an officer who adjudicates his
case’ is entitled to relief.” 138 S. Ct. at 2055 (emphasis added) (quoting Ryder, 515
2 Samuels, Kramer & Co. v. Commissioner, 930 F.2d 975 (2d Cir. 1991), cited by Gonnella during oral argument, is not to the contrary. There, we held that “[a]lthough . . . [a] Company affirmatively elected to proceed in the Tax Court, this choice of forum in itself cannot be equated with a waiver of constitutional safeguards,” especially where that company “challenged the assignment of its cases to a special trial judge from the outset.” Id. at 983. We thus examined not whether the failure to object constituted forfeiture of a claim, but whether a petitioner who did object could be deemed to have subsequently waived its claim “through silence or mere submission to the jurisdiction of the forum.” Id. at 984; see also United States v. Spruill, 808 F.3d 585, 605 (2d Cir. 2015) (“Waiver is different from forfeiture. Whereas forfeiture is the failure to make the timely assertion of a right, waiver is the ‘intentional relinquishment or abandonment of a known right.’” (Pooler, J., dissenting) (quoting United States v. Olano, 507 U.S. 725, 733 (1993))).
11 U.S. at 182–83). There are compelling policy reasons behind such a rule. As Justice
Scalia recognized, forfeiture is “not . . . mere[ly] [a] technicality,” but rather “is
essential to the orderly administration of justice.” Freytag, 501 U.S. at 894–95
(Scalia, J., concurring in part and concurring in the judgment) (quoting 9 C. Wright
& A. Miller, Federal Practice and Procedure § 2472, p. 455 (1971)). At bottom,
“[a]ny other rule would create a disincentive to raise Appointments Clause
challenges with respect to questionable judicial appointments.” Ryder, 515 U.S. at
183.
Gonnella has not shown this is one of those “rare cases” that would excuse
his failure to object. We therefore hold – as have at least two other circuit courts
that have considered the question – that a litigant who does not object to the
constitutionality of an ALJ at any point during the SEC proceedings forfeits that
challenge. See Cooper v. SEC, 788 F. App’x 474, 474–75 (9th Cir. 2019) (“The only
issue [petitioner] raises in the opening brief is whether the ALJ was properly
appointed under the Appointments Clause. However, because [petitioner] did not
timely raise this issue before the Commission, he may not raise the issue on
appeal.”); Malouf v. SEC, 933 F.3d 1248, 1255 (10th Cir. 2019) (“[Petitioner] forfeited
[his Appointments Clause challenge] by failing to present it in the SEC
12 proceedings.”); Kabani & Co. v. SEC, 733 F. App’x 918, 919 (9th Cir. 2018)
(“[P]etitioners forfeited their Appointments Clause claim by failing to raise it in
their briefs or before the agency.”), cert. denied sub nom., 139 S. Ct. 2013 (2019); see
also David Stanley Consultants v. Dir., Office of Workers’ Comp. Programs, No. 18-3406,
2020 WL 504961, at *3 (3d Cir. Jan. 31, 2020) (relying on Lucia for the proposition
that, in a Black Lung Benefits Act case, a petitioner who does not make a “timely”
Appointments Clause challenge to the Benefits Review Board forfeits such a
claim); NLRB v. RELCO Locomotives, Inc., 734 F.3d 764, 798 (8th Cir. 2013) (holding
that a challenge to the composition of the National Labor Relations Board under
the Recess Appointments Clause was not jurisdictional and could be forfeited if
not raised to the Board).
Congress may, of course, excuse the failure to object in certain
circumstances. In securities cases, Congress has generally provided that a failure
to object under the Exchange Act or Investment Advisers Act (the "Advisers Act")
may be excused in the event that there are “reasonable grounds” to do so, 15 U.S.C.
§§ 78y(c)(1), 80b-13(a), although it has not created such an exception in the
Securities Act, see id. § 77i(a). In any event, Gonnella points to no reasonable
grounds that would excuse his failure to raise the objection below beyond the fact
13 that Lucia had not yet been decided. Gonnella does not deny that other litigants
were raising Appointments Clause challenges to ALJs around the time he was
litigating his case before the SEC. For example, Raymond Lucia, whose case would
form the basis of the Supreme Court’s Lucia decision, submitted his briefing to the
Commission in 2014 and submitted supplemental briefing to the Commission on
the Appointments Clause issue in July 2015. See Respondent’s Supplemental
Briefing in Support of Appeal, In the Matter of Raymond J. Lucia Cos., et al., Admin
Proc. File No. 3-15006 (2015) (Doc. No. 81). The Commission decided that case in
September 2015 – almost a year prior to deciding Gonnella’s case. In the Matter of
Raymond J. Lucia Cos., et al., Release No. 4190, 2015 WL 5172953 (Sept. 3, 2015). In
fact, in June 2016, while Gonnella’s case was pending before the SEC, this Court
explicitly recognized the growing trend of raising claims regarding the
constitutionality of ALJs. See Tilton v. SEC, 824 F.3d 276, 279–80 (2d Cir. 2016)
(“During the past year or so, several respondents in ongoing SEC administrative
proceedings have asserted that Article II of the United States Constitution bars the
agency’s ALJs from acting as hearing officers . . . [because they] were not
appointed in accordance with the Appointments Clause.”). Despite having
constructive notice of the argument and relevant Supreme Court precedent –
14 which was ultimately heavily relied upon by the Supreme Court in Lucia –
Gonnella failed to raise such a claim. See Malouf, 933 F.3d at 1258 (“In the SEC
proceedings, Mr. Malouf could have invoked Freytag, just as the petitioners
in Bandimere and Lucia had done.”); see also Island Creek Coal Co. v. Wilkerson, 910
F.3d 254, 257 (6th Cir. 2018) (highlighting that Lucia stated that Freytag established
“everything necessary to decide this case,” and ultimately finding forfeiture
because appellants failed to raise the argument in their opening briefs
(quoting Lucia, 138 S. Ct. at 2053)).
Gonnella nevertheless argues that it would have been futile to raise the
argument to the Commission given the SEC’s long history of using ALJs and its
previously articulated position on the legality of that practice. Oral Argument at
1:26–2:03, Gonnella v. SEC, 16-3433 (2019), http://www.ca2.uscourts
.gov/oral_arguments.html. But a pessimistic view of the Commission’s likelihood
of granting the motion is not enough to overcome the traditional rule mandating
litigants to lodge their objections during the administrative proceedings. Indeed,
Gonnella’s futility argument is in tension with our decision in Tilton, in which we
assessed the subject matter jurisdiction of a district court to consider an
Appointments Clause challenge to the SEC’s ALJs, and held that, “[b]y enacting
15 the SEC’s comprehensive scheme of administrative and judicial review, Congress
implicitly precluded federal district court jurisdiction over [an] appellant[‘s]
constitutional [Appointments Clause] challenge” prior to review by an ALJ and
the Commission. 824 F.3d at 279. We emphasized that “appellants will have
access to meaningful judicial review of their Appointments Clause claim through
administrative channels.” Id. at 286. Although we made this assessment in the
context of jurisdiction, the logic extends to forfeiture – the SEC had jurisdiction to
hear the claim, and was in a position to provide meaningful review. It would thus
not have been futile for Gonnella to raise the claim before the Commission.
In sum, Gonnella has not shown that this is “one of those rare cases” under
Freytag that merits excusing forfeiture, and he has not shown reasonable grounds
that would excuse his failure to object under the statutory scheme. Since Gonnella
did not raise a constitutional argument to the ALJ or to the Commission, either in
his initial briefs or via supplemental briefing prior to the Commission’s final
decision, he may not raise this objection now.
B. The SEC’s Cooperation Agreement with King Did Not Violate Gonnella’s Right to Due Process Gonnella next raises two challenges regarding the Enforcement Division’s
cooperation agreement with King. First, he insists that because the program
16 guidance under which the Enforcement Division signed up King as a cooperating
witness did not go through the Notice and Comment procedures of the APA, his
administrative hearing was tainted. Second, Gonnella contends that the
Commission acted unconstitutionally as both the “prosecutorial and sentencing
power” in implementing the program. Petitioner’s Br. at 48. Neither argument is
persuasive.
1. 17 C.F.R. § 202.12: Enforcement Guidance Gonnella argues – for the first time on appeal – that the SEC’s enforcement
program constituted a rule change that should have gone through the APA’s
Notice and Comment process. As an initial matter, Gonnella forfeited this
challenge. “No objection to an order or rule of the Commission, for which review
is sought under this section, may be considered by the court unless it was urged
before the Commission or there was reasonable ground for failure to do so.” 15
U.S.C. § 78y(c)(1); see MFS Sec. Corp. v. SEC, 380 F.3d 611, 620–21 (2d Cir. 2004).
Although Gonnella originally challenged the constitutionality of the enforcement
program, discussed in further detail below, he never mounted a challenge to the
legitimacy of 17 C.F.R. § 202.12 for failing to comply with the APA.
But even assuming that Gonnella has not forfeited this argument, we find
that 17 C.F.R. § 202.12 is a policy statement, not a rule, and thus is not subject to
17 the Notice and Comment requirements of the APA. The APA’s requirement that
“[g]eneral notice of proposed rule making shall be published in the Federal
Register” does not apply to “interpretative rules, general statements of policy, or
rules of agency organization, procedure, or practice.” 5 U.S.C. § 553(b)(A). As we
have previously explained, policy statements generally impact agency behavior
rather than change the “existing rights” of others outside the agency. Noel v.
Chapman, 508 F.2d 1023, 1030 (2d Cir. 1975) (internal quotation marks omitted).
“The central question is essentially whether an agency is exercising its rule-making
power to clarify an existing statute or regulation, or to create new law, rights, or
duties in what amounts to a legislative act.” White v. Shalala, 7 F.3d 296, 303 (2d
Cir. 1993). Such “legislative rules,” which must go through Notice and Comment
procedures, have “legal effect.” Sweet v. Sheahan, 235 F.3d 80, 91 (2d Cir. 2000). To
determine if a rule has “legal effect,” we look to:
(1) whether in the absence of the rule there would not be an adequate legislative basis for enforcement action or other agency action to confer benefits or ensure the performance of duties, (2) whether the agency has published the rule in the Code of Federal Regulations, (3) whether the agency has explicitly invoked its general legislative authority, or (4) whether the rule effectively amends a prior legislative rule. Id. (quoting Am. Mining Cong. v. Mine Safety & Health Admin., 995 F.2d 1106, 1112
(D.C. Cir. 1993)).
18 Here, the first Sheahan factor is not even applicable, since the guidance
contains no new rules for enforcement action. Moreover, although the
Commission’s enforcement guidance was published in the Code of Federal
Regulations, it does not amount to an exercise of the agency’s legislative authority
since it merely promulgated a “policy statement” setting forth “the analytical
framework employed by the Commission and its staff [to] . . . ensure[] that
potential cooperation arrangements maximize the Commission’s law enforcement
interests.” 17 C.F.R. § 202.12. The policy emphasizes that “the evaluation of
cooperation requires a case-by-case analysis of the specific circumstances
presented.” Id. It is highly discretionary, non-binding, and does not impose any
legal requirements on cooperating parties or the Commission. The document is a
quintessential policy document that serves to increase transparency regarding the
SEC’s approach to cooperation. We therefore hold that the policy need not have
gone through the Notice and Comment procedures of the APA.
2. The Commission as a “Prosecutorial Witness” Gonnella further argues that the SEC’s use of cooperators violated his right
to due process because the cooperator’s “sentence” is not imposed by a
representative of the judiciary. He further argues that the agreement “incentivized
19 Mr. King to stretch the truth to please the same prosecutorial and sentencing
power.” Petitioner’s Br. at 48.
But the cooperation agreement, entered into with the Enforcement Division,
did nothing more than outline broad standards that the Commission may consider
when looking at cooperation. The agreement itself stated it was entered “freely
and voluntarily.” App’x 991. It clearly stated that the Division “cannot, and does
not, make any promise or representation as to whether or how the Commission
may act on enforcement recommendations.” Id. It further clarified that it was not
binding, and the Commission could reject any recommendations it received. The
use of cooperators does not violate due process simply because it takes place
within the confines of the administrative state. We have never seriously
questioned the premise that the SEC may use evidence and testimony garnered
from a cooperating witness, and see no reason to do so now. See, e.g., In re
Steinhardt Partners, L.P., 9 F.3d 230, 236 (2d Cir. 1993) (noting the benefits of
cooperating with the SEC).
As to Gonnella’s claim regarding King’s bias, there is no evidence to suggest
that the agreement coerced King to testify any more than a cooperation agreement
in any criminal case coerces a cooperating witness into testifying. Petitioner’s
20 reliance on United States v. Waterman, 732 F.2d 1527 (8th Cir. 1984), is unpersuasive.
Unlike in Waterman, Gonnella was not offered favorable treatment contingent
upon the success of the prosecution. Id. at 1531. Moreover, during the public
hearing Gonnella was able to cross-examine King to explore any biases he might
have had. In light of the clear language of the agreement and the lack of any
concrete evidence of bias, Gonnella’s argument simply does not carry weight.
C. The ALJ Did Not Engage in Impermissible Fact-Finding Gonnella next argues that the Commission violated his right to due process
by permitting the ALJ to create independent evidence and conduct independent
fact-finding after the close of the evidence without providing Gonnella notice and
an opportunity to be heard. In particular, Gonnella objects to the ALJs
consideration of “obscure” law review articles in reaching its findings following
the hearing. Petitioner’s Br. at 37. But any error – and we are not convinced there
was any – that may have occurred during the ALJ’s adjudication was cured during
the proceeding before the Commission. Not only did the Commission conduct de
novo review of the facts and law, as statutorily required, but it explicitly stated that
it did not rely on any of the articles to which Gonnella now objects.
21 D. There Was Sufficient Evidence Supporting the Commission’s Findings Finally, Gonnella makes two arguments regarding the sufficiency of the
evidence at his disciplinary hearing. First, he argues that there was insufficient
evidence to prove that he committed a primary violation of the securities laws.
Second, Gonnella asserts that there was insufficient evidence to establish that he
aided and abetted Barclays in a books and records violation. We disagree.
1. Primary Violation
Under Securities Act section 17(a), it is “unlawful for any person in the offer
or sale of any securities,” with scienter, “to employ any device, scheme, or artifice
to defraud.” 15 U.S.C. § 77q(a)(1). Under Exchange Act section 10(b) and
Exchange Act Rule 10b-5, it is unlawful for “any person, directly or indirectly,”
with scienter, “[t]o use or employ, in connection with the purchase or sale of any
security . . . any manipulative or deceptive device or contrivance in contravention
of” Commission rules. Id. § 78j(b); 17 C.F.R. § 240.10b-5. In this context, severely
“reckless conduct” is sufficient to constitute scienter. Rolf v. Blyth, Eastman Dillon
& Co., 570 F.2d 38, 47 (2d Cir. 1978).
Even a cursory review of the record reveals substantial evidence that
Gonnella intentionally engaged in deceitful behavior contrary to Barclays’s policy
in order to gain a personal benefit. Specifically, Gonnella acknowledged that he
22 was aware of Barclays’s policy prohibiting trade parking, and admitted that he
engaged in the trades to avoid the charges that would have been assessed to his
book pursuant to Barclays’s aged-inventory policy. The record is clear that
Gonnella took steps to conceal his actions: he used vague, coded language in
Bloomberg messages and did not disclose his agreement to repurchase the
securities to either the compliance department or his direct supervisor, despite
their growing suspicions. In addition, he did not properly record the trades in his
trading book. Finally, there can be no doubt that Gonnella derived a personal
benefit from his misconduct. Although he claims his actions did not impact his
compensation, the record makes clear that as much as $950,000 of his annual
compensation was from his bonus, and Gonnella himself admitted that he
understood that having higher profits would increase the chances he would get a
larger bonus. And while Gonnella ultimately reported the violation himself, the
evidence established that he did so only when he knew that his supervisor was
about to report him.
Although Gonnella makes much of the fact that Barclays represented that
Gonnella did not violate the securities statutes when it reported his conduct to the
SEC, Barclays’s views on the law do not bind the Commission or this Court. Put
23 simply, Barclays concluded that Gonnella structured trades to avoid the aged-
inventory policy and the charges that would have been assessed against his trade
book. He then bought the securities back from King – at a higher price than he
had previously sold them – at Barclays’s expense. That is exactly what the
Commission found, and the Commission determined that this behavior violated
the securities laws. Taken together, the evidence was more than sufficient to show
Gonnella’s scienter.
Gonnella next argues that there was insufficient evidence to show that he
actually committed fraud. As outlined above, claims under section 17(a) require
proof of a “scheme . . . to defraud.” 15 U.S.C. § 77q(a)(1). Similarly, claims under
section 10(b) and Rule 10b-5 require proof of a “manipulative or deceptive device
. . . in contravention of” Commission rules. Id. § 78j(b); 17 C.F.R. § 240.10b-5. In
line with this, the Commission accurately found that Gonnella “acted deceptively
by conveying a false appearance of compliance with Barclays’s aged[-]inventory
policy, thereby misleading Barclays about how long he had held a position in the
relevant bonds and the degree of risk to the firm as a result of those trading
positions.” App’x 1066.
24 Here, the Commission found sufficient evidence that Gonnella sold
securities to King for a temporary period of time, after which Gonnella
repurchased those securities at a higher price. He did this to avoid $726,000 in
irreversible aged-inventory charges, which would have negatively impacted his
bonus. In doing so, Gonnella caused Barclays to pay $111,000 more to repurchase
the securities at issue. In essence, he deceived Barclays into “paying a premium”
for these securities. App’x 1067. In addition to costing Barclays money, Gonnella
also increased the risk that Barclays faced in holding inaccurately valued
securities. The aged-inventory policy was put in place to make sure that the
trader’s “valuation for a security reflected the prevailing market price at which he
could buy and sell the security;” violating this policy “exposed Barclays to the risk
of holding securities that [were] overvalued or undervalued.” App’x 1067.
In the face of this clear evidence, Gonnella responds that (1) roundtrip trades
were common in this marketplace, (2) he only violated an internal policy, and (3)
there was no agreement to repurchase the securities. None of these arguments is
compelling or constitutes a defense to his securities violations. As to his first point,
the fact that behavior is common does not mean it is not fraud. Newton v. Merrill,
Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 274 (3d Cir. 1998) (en banc) (“Even
25 a universal industry practice may still be fraudulent.”); Chasins v. Smith, Barney &
Co., 438 F.2d 1167, 1171 (2d Cir. 1970). As to his second point, committing fraud
and violating internal policy are not mutually exclusive. See United States v.
Naftalin, 441 U.S. 768, 770 (1979) (federal securities laws “prohibit[] frauds against
brokers as well as investors”). Finally, as to his third point, there was more than
sufficient evidence to demonstrate Gonnella’s intent to repurchase the securities.
As explained in greater detail above, Gonnella organized the transactions with
King, who had no experience with this type of trade, and led King to believe he
would buy them back, which he in fact did, at a premium. In short, the
Commission was completely justified in concluding that Gonnella intentionally
violated the securities laws.
2. Aiding and Abetting Gonnella similarly argues that the Commission’s findings were insufficient
to establish that he aided and abetted his employer’s violations of the books and
records provisions of section 17(a) and Rule 17a-3(a)(2), the latter of which requires
that registered broker-dealers “make and keep current . . . [l]edgers (or other
records) reflecting all assets and liabilities, income and expense and capital
accounts.” 17 C.F.R. § 240.17a-3(a)(2). “In order for a defendant to be liable as an
aider and abettor in a civil enforcement action, the SEC must prove: (1) the
26 existence of a securities law violation by the primary (as opposed to the aiding and
abetting) party; (2) knowledge of this violation on the part of the aider and abettor;
and (3) substantial assistance by the aider and abettor in the achievement of the
primary violation.” SEC v. Apuzzo, 689 F.3d 204, 206 (2d Cir. 2012) (internal
quotation marks omitted).
As the Commission found, Barclays violated Exchange Act section 17(a) and
Rule 17a3(a)(2) by “maintain[ing] books and records that did not reflect Gonnella’s
agreement with King.” App’x 1071. Gonnella documented his trades without
indicating that there was an agreement to repurchase the bonds, and thus made
the books inaccurate. Gonnella’s only defense is that he did not engage in stock-
parking or prearranged trades. But, as stated above, there was more than enough
circumstantial evidence for the Commission to find that Gonnella did just that.
This argument, like the others, therefore fails.
E. The Commission Did Not Improperly Sanction Gonnella Finally, Gonnella argues that the Commission violated due process when it
imposed higher sanctions than the ALJ had originally imposed. The securities
regulations make clear that if a party files a timely petition for review “or if the
Commission on its own initiative orders review of a decision . . . the initial decision
shall not become final as to that party or person.” 17 C.F.R. § 201.360(d)(1).
27 Moreover, the Commission “may affirm, reverse, modify, set aside or remand for
further proceedings, in whole or in part, an initial decision by a hearing officer and
may make any findings or conclusions that in its judgment are proper and on the
basis of the record.” Id. § 201.411(a); see also Checkosky v. SEC, 23 F.3d 452, 461 (D.C.
Cir. 1994) (“Since the Commission (not the ALJ) is charged with the responsibility
to suspend petitioners, the initial decision of the ALJ is of limited consequence.”).
Under Exchange Act section 15(b)(6) and Advisers Act section 203(f), the
Commission can suspend a defendant for up to 12 months or can bar him “from
being associated with a broker, dealer, investment adviser, municipal securities
dealer, municipal advisor, transfer agent, or nationally recognized statistical rating
organization” if the Commission determines the defendant’s acts were willful
violations of the securities laws and such a bar would serve the public interest. 15
U.S.C. §§ 78o(b)(6)(A), 80b-3(f). Further, the Investment Company Act allows the
Commission to “prohibit, conditionally or unconditionally, either permanently or
for such period of time as it in its discretion shall deem appropriate in the public
interest,” any person from serving in certain capacities with respect to an
investment company so long as the securities violation was willful, and the ban is
in the public interest. Id. § 80a-9(b).
28 Here, both Gonnella and the Enforcement Division petitioned the
Commission for review. In its petition for review, the Enforcement Division
argued that the length of time that the ALJ imposed as a penalty was “inadequate
in light of the [administrative] law judge’s findings concerning the extent of
Gonnella’s misconduct.” App’x 1035. The Division requested that the
Commission “impose permanent collateral and penny-stock bars on Gonnella or,
in the alternative, impose bars of sufficient length to effectuate their remedial
purpose and protect the public interest.” App’x 1037.
As the Commission noted, its review, including review of sanctions, is de
novo. App’x 1076 (citing In re Gary M. Kornman, Exchange Act Release No. 2840,
2009 WL 367635, at *9 n.44 (Feb. 13, 2009)). And while the Enforcement Division
did not specifically request that the Commission bar Gonnella from serving in
certain positions under the Investment Company Act, the Commission
nonetheless found such sanctions were warranted. The Commission noted that
the order instituting proceedings against Gonnella specifically sought relief under
the Investment Company Act section 9(b), 15 U.S.C. § 80a-9(b), which authorizes
a lifetime ban. App’x 1073 n.52; App’x 3. Moreover, the Commission found that
Gonnella’s fraud was “egregious[],” S. App’x 82, and that because Gonnella still
29 did not grasp the seriousness of his actions, he was likely to commit additional
offenses. Over the dissent of Commissioner Piwowar, the majority of the
Commissioners found a life ban with the possibility of reapplication in five years
to be appropriate.
The SEC’s ability to increase penalties flows logically from the statutory
scheme – its review is de novo, and the ALJ’s decision is not final. Despite
Gonnella’s claims that the punishment is “draconian,” see Petitioner’s Reply Br. at
49–50, the Court must “not disturb the SEC’s choice of sanction unless it is
unwarranted in law or without justification in fact,” Mathis, 671 F.3d at 216
(internal quotation marks omitted). Here, we have no reason to doubt that the
sanctions imposed by the Commission were both warranted by law and justified
in fact. Accordingly, we find no basis for disturbing the Commission’s order.
CONCLUSION For the reasons stated above, the petition for review is DENIED and the
decision of the Commission is AFFIRMED in its entirety.