Thornton v. SEC

• Court: Court of Appeals for the Fifth Circuit
• Decided: November 9, 1999
• Docket: 99-60201
• Status: Unpublished

Opinion

UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

________________________________________

No. 99-60201 Summary Calendar ________________________________________

JAMES HARVEY THORNTON,

Petitioner,

versus

SECURITIES AND EXCHANGE COMMISSION,

Respondent. ______________________________________________

On Petition for Review of an Order of the Securities and Exchange Commission (Admin. Proc. File No. 3-9046) ______________________________________________

October 22, 1999

Before POLITZ, JOLLY, and WIENER, Circuit Judges:

Per Curiam*

Petitioner James Harvey Thornton (“Thornton”) seeks review of

an order of the Securities and Exchange Commission (“SEC” or

“Commission”) sustaining sanctions imposed on him by an

administrative law judge (“ALJ”) for violating sections 15(b)(4)(E)

and 15(b)(6) of the Securities and Exchange Act of 1934. The

violations involve Thornton’s failure to supervise a registered

representative, Gail Griseuk (“Griseuk”) and, accordingly, to

prevent her violations of section 17(a) of the Securities Act of

* Pursuant to 5th Cir. R. 47.5, the Court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5th Cir. R. 47.5.4.

1 1933 and section 10(b) of the Securities and Exchange Act of 1934

and Rule 10b-5 thereunder. Thornton admits to violating the Act

but challenges the sanctions imposed. We affirm.

I.

Facts and Proceedings

Thornton is a registered representative employed by and

serving as president and compliance officer of a Houston, Texas

securities brokerage firm, Payne & Thornton, Inc. d/b/a Retirement

Investment Group (“Retirement”). Griseuk is a registered

representative who worked for Retirement out of offices in Florida,

from 1988 to late 1991. Under her employment agreement, Griseuk

received ninety percent of all commissions she generated. She

quickly became Retirement’s most productive salesperson, by 1991

bringing in fifty percent of the firm’s revenue.

At the time she was hired by Retirement, Griseuk represented

that she had never been the subject of an investment-related,

customer-initiated complaint or proceeding; but, in fact, at that

time, she was the subject of two separate customer complaints

alleging that she had placed her customers in unsuitable

investments (both actions were dismissed). Immediately after

Griseuk joined Retirement, another customer suitability lawsuit was

filed against her. That suit resulted in a total judgment of

$898,528, which forced her to file for bankruptcy protection. Less

than one year later, thirty-two plaintiffs filed a class action

lawsuit against her which was dismissed.

Thornton was notified of these suits by disclosure forms

2 supplied by the National Association of Securities Dealers, Inc.

(“NASD”) and by a former employee of Griseuk’s. Thornton testified

that he received the disclosure forms but “missed” the information

on them about Griseuk’s disciplinary history. In addition to

failing to inform himself about Griseuk’s prior wrongdoing,

Thornton failed to monitor her work, audit her client accounts,

conduct surprise inspections, or interview her salespeople or

employees, even though, according to written supervisory

procedures, Thornton, as president, was the sole officer

responsible for supervision of registered representatives employed

by the firm. Not until the fall of 1991, when two Griseuk clients

expressed concern to Thornton regarding her high-pressure sales

tactics, did Thornton modify some of Retirement’s procedures and

supervisory policies.

In 1991, the Division of Enforcement of the SEC brought

charges against Griseuk in connection with the offer, purchase, and

sale of nearly $5 million worth of securities, mostly in the form

of high-risk limited partnership interests. Griseuk settled the

charges, consenting to findings that she violated securities laws

by making false and misleading statements and material omissions

regarding the risk, safety, and liquidity of certain securities, as

well as making false statements about the compensation she earned

from selling those securities. She was ordered to remit $370,786,

the approximate amount of her commissions, plus interest, all but

$20,000 of which was waived due to her insolvency.

The Division of Enforcement of the SEC thereafter brought

3 charges against Retirement and Thornton for failure to supervise

Griseuk. The ALJ, in determining the appropriate sanctions,

reviewed Thornton’s own disciplinary history and discovered that he

had been disciplined by the NASD and state securities regulators

eight different times for failure to supervise the firm’s

registered representatives and for mishandling client funds. On

those prior incidents, Thornton was censured, fined, and once had

his license revoked for six days. The ALJ, after hearing

Thornton’s testimony and reviewing the documentary evidence,

revoked Retirement’s broker-dealer registration, imposed a civil

monetary penalty of $50,000.00 on Retirement, permanently barred

Thornton from acting as a broker-dealer, barred him from

association with any broker-dealer, and imposed a civil monetary

penalty of $5,000.00 on Thornton.

Thornton and Retirement petitioned the SEC for review of the

ALJ’s decision. The SEC did not dispute the ALJ’s findings of

fact, and accordingly affirmed the civil monetary penalties and the

permanent ban on supervisory work but adjusted the severe sanction

of a total ban on work as a registered representative to a three-

year ban. The SEC also reversed the ALJ’s sanction barring

Thornton from participating in penny stock offerings, finding such

a bar irrelevant to the type of fraud committed.

II.

Standard of Review

We review the Commission’s decision to impose a particular

4 sanction for gross abuse of discretion.1 The choice of sanction

will not be overturned unless unwarranted in law or without

justification in fact.2

III.

Discussion

Thornton does not appeal the monetary sanction or the ban on

supervisory activities. He asserts, however, that the temporary

ban on his license to serve customers individually was an abuse of

discretion by the SEC. Thornton argues that as he was sixty-four

years-old at the time of the hearing in 1996, a three-year ban has

the same effect as a lifetime ban and would leave him with no means

of supporting himself. Moreover, he contends that neither the

alleged wrongdoing in connection with Griseuk nor his prior eight

disciplinary proceedings regarding inadequate supervision in any

way bear on his ability to serve the public in an individual

capacity; therefore, the ban on his working directly with clients

was an abuse of discretion. Thornton asks us to remove the three-

year ban on his practice as a registered representative or,

alternatively, to reduce the ban to not more than ninety days.

We conclude that the SEC did not abuse its discretion in

banning Thornton from working as a registered representative for

three years. Sanctions for securities violations must be

administered with an eye towards protecting the public rather than

1 Amato v. Securities and Exchange Commission, 18 F.3d 1281, 1284 (5th Cir. 1994). 2 Butz v. Glover Livestock Commission Co., 411 U.S. 182, 186- 87 (1973).

5 merely punishing the wrongdoer.3 Certainly, revocation of a

professional license and exclusion from the industry is a severe

sanction which, at first glance, might appear punitive.

Accordingly, the Commission has an obligation specifically to

articulate why a less severe sanction would not suffice.4

In complying with its duty to articulate such reasons, the

Commission should consider “the egregiousness of the defendant’s

actions, the isolated or recurrent nature of the infraction, the

degree of scienter involved, the sincerity of the defendant’s

assurances against future violations, the defendant’s recognition

of the wrongful nature of his conduct, and the likelihood that the

defendant’s occupation will present opportunities for future

violations.”5 The Commission may not presume future wrongdoing

merely on the basis of past misconduct.6 Here, the ALJ and

Commission sufficiently articulated reasons for imposing the

sanction by pointing out the recurrent nature of Thornton’s

supervisory infractions, the perceived lack of sincerity in his

testimony, his failure to recognize the wrongfulness of his prior

conduct, and the likelihood of opportunities for future misconduct.

In affirming the subject order of sanctions, we are

3 Beck v. Securities and Exchange Commission, 430 F.2d 673, 674 (6th Cir. 1970) (citing U.S. Supreme Court precedent and cases from other circuits); see also Meadows v. Securities and Exchange Commission, 119 F.3d 1219, 1128 n. 20 (5th Cir. 1997). 4 Steadman v. Securities and Exchange Commission, 603 F.2d 1126, 1139-40 (5th Cir. 1979), aff’d 450 U.S. 91 (1981). 5 Id. at 1140. 6 Id.

6 particularly persuaded by the evidence that Thornton has been

sanctioned eight times previously for violations in connection with

the broker-dealer business. True, as he points out, all of the

prior sanctions related to his failure adequately to supervise

registered representatives employed by Retirement and not to his

conduct as a registered representative; but the ALJ determined that

in light of several past sanctions which did not curb Thornton’s

unlawful behavior, the more severe sanction is in the public

interest.7 Thornton demonstrated a continual pattern of culpable

behavior, apparently reckless to the interests of customers who

might be harmed.8 As long as he has a license to work as a

registered representative, he will have opportunities to act in a

supervisory capacity and otherwise to compromise the interest of

clients.

In addition, we are persuaded by the conclusions of the ALJ ——

the only adjudicator to view the witness’s demeanor —— who doubted

Thornton’s credibility in saying that he was unaware of Griseuk’s

conduct prior to or during her employment with Retirement, as well

as his sincerity in expressing remorse about his admitted

violations of securities laws by inadequate supervision. The ALJ

found that Thornton “deliberately obfuscates,” “uses excuses,” and

“gave blatantly untruthful testimony.” In the ALJ’s view, Thornton

7 The ALJ stated, “Because Mr. Thornton refuses to acknowledge that he has ever done anything wrong, the probability that he will continue violating the securities laws and regulations is almost certain.” 8 See similarly Meadows, 119 F.3d at 1228.

7 remained wilfully blind to Griseuk’s violations because of the

considerable revenue she was generating for Retirement.

On the basis of all the evidence before him, the ALJ

permanently banned Thornton from working in his chosen profession

as a registered representative. That evidence as well as the

relevant legal standards were reviewed by the SEC which has already

extended some appellate relief to Thornton by lessening the

sanction to a three-year bar.9 We agree that, in addition to the

civil monetary penalty and the permanent ban on supervisory work,

the three-year ban on Thornton’s work as a registered

representative is necessary to protect the investing public and to

deter future violations. Based on our review of the Initial

Decision of the ALJ and the Opinion of the Commission in light of

the facts revealed by the record and the legal arguments advanced

in the appellate briefs of counsel, we conclude that the three-year

ban was warranted by law and justified in fact, and was not the

product of an abuse of discretion. For essentially the same

reasons as set forth in the well-reasoned opinions of the ALJ and

the SEC, the modified order of sanctions is, in all respects,

AFFIRMED.

9 Meadows, 119 F.3d at 1228 n.21 (noting that the re-entry into the brokerage industry after a temporary bar is not entirely illusory).