442 F. 3d 834 - Securities and Exchange Commission v. Jw Barclay & Co Inc

This appeal arises out of a defunct broker-dealer's unpaid penalty for a securities law violation. The Securities and Exchange Commission ("SEC") filed an application with the District Court seeking an order directing the broker-dealer to pay the penalty. In addition, the SEC also sought a judgment that the former president of the company was jointly and severally liable for this unpaid penalty and an order directing him to pay the penalty. Following discovery, the District Court granted the SEC's unopposed motion for summary judgment and ordered the former president to pay the penalty. Because we hold (1) that the Securities Exchange Act of 1934 ("Exchange Act") provides for a control person's joint and several liability to the SEC for a debt in the amount of an unpaid SEC penalty when that control person induced and was a culpable participant in the controlled person's failure to pay the penalty and (2) that the District Court had jurisdiction in this case to grant an order directing such a control person to fulfill this obligation, we will affirm the judgment of the District Court.

J.W. Barclay & Co., Inc. ("Barclay") was a securities broker-dealer. Appellant John Bruno ("Bruno") was one of the founders of Barclay. Bruno owned 68 percent of Barclay, and he acted as Barclay's President from July of 1991 through at least February of 2003.

On October 20, 1998, the SEC instituted administrative proceedings against Barclay, alleging violations of § 17(a) of the Exchange Act1 and Rule 17-a-52 due to Barclay's failure to timely file a Form BD-Y2K. Form BD-Y2K required a broker-dealer to supply information about the broker-dealer's Year 2000 preparedness.3

In February of 1999, an Administrative Law Judge ("ALJ") held a hearing on this matter. On August 2, 1999, the ALJ found that Barclay had willfully violated § 17(a) and Rule 17a-5 and ordered Barclay to pay a $50,000 civil penalty. Barclay appealed the ALJ's decision and the SEC heard oral argument on July 18, 2001. On October 15, 2001, the SEC affirmed the ALJ's finding that Barclay had willfully violated § 17(a) and Rule 17a-5, but it reduced Barclay's civil penalty to $25,000 and directed Barclay to make payment on the penalty within thirty days ("Order").

The SEC sent copies of the Order to Barclay's attorney of record, and Barclay's outside counsel notified Bruno that Barclay owed payment of the $25,000 penalty to the SEC. Barclay did not appeal the Order, but the company also did not pay the penalty within thirty days, or at any time thereafter.

In the meantime, Barclay had ceased operation as a broker-dealer on December 27, 2000, because it was in violation of the SEC's net capital requirements. At the end of 2000, Barclay's liabilities were greater than its assets.4 During 2001, while the ALJ's decision was on appeal to the SEC, Bruno caused Barclay to concentrate its remaining assets, a total of more than $145,000, into Barclay's bank account. Bruno then caused Barclay to issue a check to himself in the amount of $90,000 and a check to another employee for $43,700. Bruno then continued to cause Barclay to place its deposits into this account and to issue checks from this account, primarily to pay legal fees. Even after the SEC issued the Order directing Barclay to pay the $25,000 penalty within thirty days, Bruno did not cause Barclay to use any of its funds to pay any part of the $25,000 penalty.

On July 1, 2002, the SEC filed an application with the District Court pursuant to § 21(e) of the Exchange Act, 15 U.S.C. § 78u(e) ("Application").5 In Count I of the Application, the SEC alleged that Barclay had not paid its civil penalty as ordered by the SEC and requested an order commanding Barclay to pay the penalty. In Count II of the Application, the SEC alleged that Bruno had "knowingly failed to cause Barclay to comply with the Commission's Order," argued that Bruno was jointly and severally liable for Barclay's unpaid penalty "by virtue of his status as a control person under Section 20(a) of the Exchange Act,"6 and requested an order commanding Bruno to pay the penalty.

Barclay did not make an appearance before the District Court and final judgment by default was entered against Barclay. On September 9, 2002, Bruno filed a pro se answer and motion to dismiss, arguing that there was "no basis for bringing this action" against him because the Order was not issued against him, he was not named in the Order, and he was not a party in the proceeding before the SEC in which the Order was issued. The SEC moved to strike Bruno's answer and Bruno filed a response to this motion, which the District Court treated as an amended answer and motion to dismiss under Rule 12(b)(6).

In his Second Defense within his response to the SEC's motion to strike, Bruno argued that he was "not liable for a debt incurred by Barclay" and that to obtain an order against him the SEC "would have to bring a separate action or proceeding against him." In his Fourth Defense, Bruno argued that the SEC could not assert control person liability against him under § 20(a) "and hold him responsible for the civil penalty against Barclay" because Bruno was not a party to the proceedings before the SEC and no order was issued against him.

The District Court then denied the SEC's motion to strike. The District Court also held that the Application stated a claim against Bruno under § 20(a) and denied his motion to dismiss.

After the completion of discovery, the SEC filed a motion for summary judgment which included a statement of undisputed facts. Bruno did not oppose this motion for summary judgment and it was decided without oral argument.

On July 28, 2004, the District Court granted the SEC's motion for summary judgment. The District Court held that "[t]he facts set forth by the SEC in this unopposed motion for summary judgment establish each of the elements required for the SEC to prevail on its Section 20(a) action against Bruno." Specifically, the District Court declared that the undisputed facts established that: (1) Barclay was subject to an SEC order requiring it to pay a $25,000 civil penalty; (2) Barclay had failed to pay this penalty; (3) Bruno had the authority and power to direct the payment of this penalty; and (4) Bruno caused Barclay to pay himself and another employee funds from Barclay's bank accounts in 2001, which in turn caused Barclay's failure to comply with the Order because it was left with insufficient funds. Applying § 20(a) to these undisputed facts, the District Court held that "Bruno both induced and culpably participated in Barclay's failure to pay the civil penalty. Accordingly, Bruno, as a control person, is jointly and severally liable for Barclay's failure to pay the civil penalty ordered by the SEC."

Bruno's pro se appeal of the District Court's order granting the SEC's motion for summary judgment followed. On June 30, 2005, we appointed Edward M. Posner of the law firm Drinker, Biddle & Reath as amicus curiae.7 We asked the amicus to address the question of "whether the SEC has standing to bring a claim against a control person under Section 20(a) of the Exchange Act, 15 U.S.C. § 78t, in an enforcement action filed pursuant to Section 21(e) of the Exchange Act, 15 U.S.C. § 78u(e)," citing the circuit split on this issue in SEC v. Coffey, 493 F.2d 1304 (6th Cir.1974), and SEC v. First Jersey Sec., Inc., 101 F.3d 1450 (2d Cir.1996). The amicus identified a third case addressing this issue, SEC v. Stringer, No. Civ. 02-1341-ST, 2003 WL 23538011 (D.Or. Sept.3, 2003).

The District Court claimed original jurisdiction over the SEC's count against Bruno pursuant to 15 U.S.C. § 78u(e). We have jurisdiction over the final judgment of the District Court pursuant to 28 U.S.C. § 1291. We review the District Court's grant of summary judgment de novo. See, e.g., A.M. v. Luzerne County Juvenile Det. Ctr., 372 F.3d 572, 578 (3d Cir.2004). Summary judgment is appropriate if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. Pro. 56(c). Once the moving party meets this initial burden, the adverse party "may not rest upon the mere allegations or denials of the adverse party's pleading, but the adverse party's response, by affidavits or as otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial." Fed. R. Civ. Pro. 56(e). "If the adverse party does not so respond, summary judgment, if appropriate, shall be entered against the adverse party." Id.

The Supreme Court has explained that the federal securities laws should be "construed `not technically and restrictively, but flexibly to effectuate its remedial purposes.'" E.g., SEC v. Zanford, 535 U.S. 813, 819, 122 S.Ct. 1899, 153 L.Ed.2d 1 (2002) (citing Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 151, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972) (quoting SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963))). Nonetheless, "[t]he broad remedial goals of the [securities laws] are insufficient justification for interpreting a specific provision `more broadly than its language and the statutory scheme reasonably permit.'" Pinter v. Dahl, 486 U.S. 622, 653, 108 S.Ct. 2063, 100 L.Ed.2d 658 (1988) (citing Touche Ross & Co. v. Redington, 442 U.S. 560, 578, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979) (quoting SEC v. Sloan, 436 U.S. 103, 116, 98 S.Ct. 1702, 56 L.Ed.2d 148 (1978))); see also Aaron v. SEC, 446 U.S. 680, 695, 100 S.Ct. 1945, 64 L.Ed.2d 611 (1980); Ballay v. Legg Mason Wood Walker, Inc., 925 F.2d 682, 690 n. 11 (3d Cir.1991).

Accordingly, citing the remedial purposes of the Exchange Act, the Supreme Court has found implied private causes of action arising under § 14(a) of the 1934 Act, see J.I. Case Co. v. Borak, 377 U.S. 426, 429-34, 84 S.Ct. 1555, 12 L.Ed.2d 423 (1964), and § 10(b) of the 1934 Act, see Superintendent of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 13 n. 9, 92 S.Ct. 165, 30 L.Ed.2d 128 (1971). The Court in Touche Ross, however, declined to find a general implied private right of action for violations of the Act arising out of § 27 of the 1934 Act, which grants to the federal district courts exclusive jurisdiction over violations of the Act and suits to enforce any liability or duty created by the Act or rules thereunder. See 442 U.S. at 576-78, 99 S.Ct. 2479. The Court reasoned that "[t]he source of plaintiffs' rights must be found, if at all, in the substantive provisions of the 1934 Act which they seek to enforce, not in the jurisdictional provision." Id. at 577, 99 S.Ct. 2479.

The Court also has held that "the scope of liability created by a particular section of the [securities laws] must rest primarily on the language of that section." Pinter, 486 U.S. at 653, 108 S.Ct. 2063; see also Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 173-78, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994) (holding that a private plaintiff could not bring an aiding and abetting suit under § 10(b) because the text of § 10(b) did not reach aiding and abetting); Ballay, 925 F.2d at 687-89 (holding that the text of § 12(2) of the 1933 Act did not create a cause of action for an oral misrepresentation in the secondary market). Similarly, the Court has looked primarily to the specific language of the relevant provisions when deriving the scienter requirements for actions arising under those provisions. See Aaron, 446 U.S. at 689-97, 100 S.Ct. 1945 (construing § 17(a)(1), § 17(a)(2), and § 17(a)(3) of the 1933 Act and § 10(b) of the 1934 Act); Ernst & Ernst v. Hochfelder, 425 U.S. 185, 197-201, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976) (construing § 10(b)). Nonetheless, the Court has also cited the remedial purposes of the securities laws when defining specific terms. See generally Landreth Timber Co. v. Landreth, 471 U.S. 681, 105 S.Ct. 2297, 85 L.Ed.2d 692 (1985) (construing the term "security" under the 1933 and 1934 Acts); TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 444-49, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976) (construing the term "material fact" under Rule 14a-9).

Finally, citing the remedial purposes of the securities laws, the Court has held that the existence of an express private action under one provision of the securities laws does not preclude the existence of an overlapping implied private cause of action under another provision where the two provisions address "different types of wrongdoing." See Herman & MacLean v. Huddleston, 459 U.S. 375, 381-87, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983) (holding that an express remedy under § 11 of the 1933 Act for misleading registration statements did not preclude an overlapping implied private cause of action for fraudulent misrepresentation under § 10(b) of the 1934 Act). The Court in Huddleston reasoned that this "cumulative construction of the securities laws . . . furthers their broad remedial purposes." Id. at 386, 103 S.Ct. 683. The Court also noted that if defrauded purchasers of securities could rely only on § 11, they would have no recourse against certain individuals who could not be reached under § 11, "even if the excluded parties engaged in fraudulent conduct while participating in the registration statement." Id. at 386 n. 22, 103 S.Ct. 683. Accordingly, the Court observed that without a cumulative construction of § 10(b), "[t]he exempted individuals would be immune from federal liability for fraudulent conduct even though Section 10(b) extends to `any person' who engages in fraud in connection with a purchase or sale of securities." See id.

The plain language of § 20(a) supports our holding that the SEC had a claim for payment from Bruno under § 20(a) because Bruno was jointly and severally liable to the SEC for a debt in the amount of Barclay's unpaid penalty. In order for Bruno to be jointly and severally liable to the SEC under § 20(a): (1) the SEC has to be a person; (2) to whom the controlled person, Barclay, was liable; (3) as a result of some act or acts constituting a violation or cause of action under any provision of the Exchange Act or any rule or regulation thereunder. See 15 U.S.C. § 78t(a).8

We join the Second Circuit and hold that the SEC is a "person" within the meaning of § 20(a). See First Jersey, 101 F.3d at 1472. We therefore decline to join the Sixth Circuit's contrary holding that the SEC is not a "person" under § 20(a). See Coffey, 493 F.2d at 1318.

The Sixth Circuit in Coffey reasoned that because § 20(b) of the Exchange Act9 "sets forth the standard of lawfulness to which a controlling person must conform, on penalty of liability in injunction to the SEC or criminal prosecution," § 20(a) was meant only "to specify the liability of controlling persons to private persons suing to vindicate their interests." Id. Accordingly, the Sixth Circuit held that the SEC was "not a person under section 20(a)" and that the SEC could not rely on § 20(a) when seeking personal injunctions against corporate officials for a corporation's alleged violations of the securities laws. Id.

Regardless of the merits of this reasoning in 1974, the Sixth Circuit's conclusion that the SEC is not a person under § 20(a) was severely undermined in 1975, when an amendment to the Exchange Act modified the Exchange Act's definition of "person." See 15 U.S.C. § 78c(a)(9) (1975 Amendments). As of 1974, the Exchange Act had defined a "person" as "an individual, a corporation, a partnership, an association, a joint stock company, a business trust, or an unincorporated organization." The 1975 amendment, however, explicitly expanded the scope of the Exchange Act's definition of a "person" so as to include governments and government agencies, changing it to "a natural person, company, government, or political subdivision, agency, or instrumentality of a government." Id.

Accordingly, while the Sixth Circuit's limitation of § 20(a) claims to "private persons" may have been supported by the Exchange Act's statutory definition of "person" as of 1974, the Exchange Act's current statutory definition of "person" explicitly includes government agencies such as the SEC.10 Consequently, we agree with the Second Circuit that the plain language of 15 U.S.C. 78c(a)(9), as amended in 1975, requires our holding that the SEC is a "person" who may bring a claim under § 20(a). See First Jersey, 101 F.3d at 1472.11

We further hold that in the circumstances of this case, Barclay was liable to the SEC for a debt in the amount of the unpaid penalty within the meaning of § 20(a). We begin with the observation that § 20(a) explicitly provides for a control person's joint and several liability. "A liability is joint and several when `the creditor may sue one or more of the parties to such liability separately, or all of them together, at his [or her] option.'" United States v. Gregg, 226 F.3d 253, 260 (3d Cir.2000) (citation omitted). Accordingly, "an assertion of joint and several liability is an assertion that each defendant is liable for the entire amount, although the plaintiff only recovers the entire amount once." Golden v. Golden, 382 F.3d 348, 355 n. 5 (3d Cir.2004) (emphasis in original). Joint and several liability can arise in many different contexts. See, e.g., id. (various torts); Gregg, 226 F.3d at 260 (statutory damages for violations of the Freedom of Access to Clinic Entrances Act); Janney Montgomery Scott, Inc. v. Shepard Niles, Inc., 11 F.3d 399, 406 (3d Cir.1993) (co-obligors under a contract).

In this case, the relevant liability of the controlled person for the purpose of defining the control person's joint and several liability under § 20(a) is the controlled person's obligation to pay some amount to a creditor when that claim for payment arises under the securities laws.12 Given the uncontested facts of this case, we hold that Barclay was liable to the SEC within the meaning of § 20(a) for a debt in the amount of the unpaid penalty. On this issue, we take note of the definitions of "debt" and "debtor" in the Federal Debt Collection Procedures Act, 28 U.S.C. § 3001 et seq. That Act defines a "debt" to the United States in part as "an amount that is owing to the United States on account of a . . . penalty. . . ." 28 U.S.C. § 3002(3)(B). A "debtor" in turn is a "person who is liable for a debt or against whom there is a claim for a debt." 28 U.S.C. § 3002(4).

Although these definitions do not appear in the Exchange Act, we find them instructive on the general relationship between unpaid penalties and the liability of persons to the United States and its agencies. In accordance with these definitions, we hold that when Barclay failed to pay its penalty within thirty days after the SEC issued its Order and the administrative proceedings concluded, Barclay became a debtor to the SEC.13 Barclay thus was liable for a debt to the SEC in the amount of this unpaid penalty as of that date.14

Finally, we hold that Barclay's failure to pay the penalty was an act constituting a cause of action under a provision of the Exchange Act, specifically § 21(e).15 We have noted that a "cause of action" has been defined as "the fact or facts which give a person a right to judicial relief . . . [or] to institute judicial proceedings." In re Remington Rand Corp., 836 F.2d 825, 830 n. 5 (3d Cir.1988) (quoting Black's Law Dictionary 201 (5th ed.1979)). In this case, the relevant facts arose when Barclay failed to pay its penalty within thirty days as provided by the Order. At that point, the SEC had a cause of action against Barclay arising under a provision of the Exchange Act because § 21(e) provides in part that the district courts of the United States, upon application by the SEC, shall have jurisdiction to issue orders commanding any person to comply with the SEC's orders. See 15 U.S.C § 78u(e). Accordingly, the SEC was entitled to obtain judicial relief against Barclay in the District Court when Barclay violated the Order by failing to pay its penalty within thirty days. Barclay's failure to pay the penalty thus was an act giving rise to a cause of action under the Exchange Act.16

In sum, the plain language of § 20(a) requires our holding that the SEC had a claim for payment from Bruno under § 20(a) because Bruno was jointly and severally liable to the SEC for a debt in the amount of Barclay's unpaid penalty. The SEC was a person to whom Barclay was liable as the result of an act constituting a cause of action under the Exchange Act. Bruno, who controlled Barclay, induced and was a culpable participant in the act constituting this cause of action, and therefore he was jointly and severally liable for this debt in the amount of the unpaid penalty.

We further note that our construction of § 20(a) serves the remedial purposes of the Exchange Act.17 With a more narrow construction of § 20(a), the deterrent effects of civil penalties arising under the Exchange Act would be diluted in cases such as this one where a closely-held firm is subject to a penalty, and the persons controlling the firm transfer the firm's assets to themselves, causing the firm to be unable to pay its penalty. Although § 20(b) may provide an overlapping remedy in some such cases, control persons who induce the transfers of the firm's assets to themselves may not have participated in the underlying violations. In that sense, our cumulative construction of § 20(b) and § 20(a) targets different forms of wrongdoing, and thus § 20(a), given our construction, could reach wrongdoers who might otherwise escape liability under § 20(b). Consequently, our construction of § 20(a) is also supported by the remedial purposes of the Exchange Act. Cf. Huddleston, 459 U.S. at 381-87, 103 S.Ct. 683.

Our holding that the SEC had a claim for payment from Bruno under § 20(a) because of his joint and several liability for a debt in the amount of the unpaid penalty does not itself imply that the SEC could assert this claim in its Application under § 21(e). Bruno has argued that because he was not a party to the Order, he could not be ordered to pay the penalty on Barclay's behalf. The amicus also has reasoned that § 21(e) is merely an enforcement mechanism for existing SEC orders and that the District Court did not have jurisdiction to issue this judgment and order against Bruno.18 We hold, however, that the plain language of § 21(e), interpreted in light of the broad remedial purposes of the Exchange Act, grants jurisdiction to the district courts to order control persons who are jointly and severally liable under § 20(a) to fulfill their individual financial obligations to the relevant claimant, even where those control persons are not subject to an existing SEC order.

We begin again with the text of the relevant provision. By its plain terms, the grant of jurisdiction to the district courts in § 21(e) is not limited to ordering persons subject to existing SEC orders to comply with those orders. Rather, the broad language of § 21(e) empowers the district courts "to issue writs of mandamus, injunctions, and orders commanding [] any person to comply with the provisions of [the Act], the rules, regulations, and orders thereunder. . . ." See 15 U.S.C. § 78u(e).

In this case, we hold that the District Court's order directing Bruno to pay Barclay's unpaid penalty was an order commanding Bruno to comply with his obligations under § 20(a). As discussed in Part III.B, supra, when a party is jointly and severally liable for a financial obligation, that party is individually responsible for paying the entire amount of the obligation to the creditor. Accordingly, insofar as Bruno was jointly and severally liable for Barclay's debt to the SEC under § 20(a), § 20(a) created a duty on Bruno's behalf to pay the entire amount of this obligation to the SEC. In that sense, the District Court simply commanded Bruno to comply with his duties as defined by § 20(a), and therefore the District Court had jurisdiction to issue this order under § 21(e).

We note again that while our construction of § 21(e) is based primarily on the plain language of the provision, it is further supported by the broad remedial purposes of the Exchange Act. In this case, as the SEC conceded, Bruno's joint and several liability under § 20(a) did not arise until Bruno induced and culpably participated in Barclay's failure to pay the penalty within thirty days as required by the Order. Accordingly, the SEC could not have ordered Bruno to comply with his duties under § 20(a) in the original Order because Bruno did not yet have any such duties.19 In contrast, when Barclay failed to pay the penalty within thirty days, the SEC's cause of action against Barclay under § 21(e) arose. Consequently, our construction of § 21(e) serves the remedial purposes of the Exchange Act because it allows the SEC to seek court orders directing payment for an unpaid penalty from all of the parties who are jointly and severally liable for such a penalty, and to do so in a single proceeding and at the first possible opportunity.20

Following discovery and the SEC's unopposed motion for summary judgment, the District Court correctly held that the undisputed facts of this case established that Bruno was jointly and severally liable under § 20(a) for Barclay's unpaid penalty. Further, the District Court properly concluded that it had jurisdiction under § 21(e) to order Bruno to comply with his obligations under § 20(a). While we base both of these holdings primarily on the plain language of the relevant provisions, we also note that this construction of § 20(a) and § 21(e) serves the remedial purposes of the Exchange Act. In short, this construction of the relevant provisions facilitates the collection of SEC penalties in cases where people who control a person subject to an SEC penalty culpably attempt to transfer the assets of the controlled person to themselves rather than directing the controlled person to pay its penalty. Facilitating the collection of SEC penalties in such cases helps to give those penalties their full intended deterrent effect, which in turn serves the remedial purposes of the Exchange Act. Accordingly, we will affirm the judgment of the District Court.