ACAP Financial, Inc. v. United States Securities & Exchange Commission
783 F.3d 763
10th Cir.2015Background
- Greyfield Capital was co-opted by fraudsters who used a forged signature stamp to issue millions of unregistered shares and run a pump-and-dump scheme.
- The fraudsters used accounts at ACAP (a penny-stock brokerage) to sell the unregistered Greyfield shares; Gary Hume was ACAP’s head trader and compliance manager.
- FINRA found ACAP and Hume violated industry rules by failing to guard against the unlawful trading of unregistered securities and recommended sanctions.
- FINRA sanctioned ACAP ($100,000) and Hume ($25,000 fine and six-month all-capacity suspension); the SEC reviewed and sustained those sanctions.
- ACAP and Hume challenged only the remedies on limited grounds: (1) that “egregious” per the FINRA Sanction Guidelines requires intent or breach of fiduciary duty, (2) SEC failed to consider specified mitigating factors, and (3) the sanctions were excessive.
- The Tenth Circuit applied the deferential standard of review for SEC remedial choices and denied the petition, concluding the SEC’s explanations were reasonable and within its discretion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does “egregious” require intentional or knowing misconduct (or fiduciary breach)? | ACAP/Hume: yes — SEC precedent shows “egregious” denotes intentional/knowing or fiduciary breach. | SEC: agency case law does not limit “egregious” to those categories; other serious supervisory failures qualify. | Court: Rejected petitioners’ premise; SEC reasonably interprets “egregious” to include severe supervisory failures without intent. |
| Did the SEC fail to consider FINRA guideline mitigating factors? | ACAP/Hume: SEC ignored or inadequately considered specific mitigating factors (acceptance of responsibility, compliance improvements, low commissions, inability to pay). | SEC: Record shows it addressed each factor and gave reasoned bases for rejecting them (e.g., remediation occurred only after detection; share volume outweighed low commissions; no financials provided). | Court: SEC considered the arguments and gave reasoned explanations; not arbitrary. |
| Were the fines excessive because they exceeded the commissions earned? | ACAP/Hume: Fines disproportionate to profits; punitive rather than remedial. | SEC: Profit is only one of many factors; deterrence, harm, volume, and repetition justify larger fines. | Court: Multi-factor balancing is permissible; fines were within guideline ranges and not arbitrary. |
| Was an all-capacity suspension improper where violations were supervisory? | Hume: Misconduct arose in supervisory role, so all-capacity suspension was inappropriate. | SEC: Supervisory failures cast doubt on fitness to serve in any capacity; past decisions support all-capacity suspensions in similar cases. | Court: SEC reasonably concluded the suspension was necessary; sanction comparable to prior cases. |
Key Cases Cited
- Rooms v. SEC, 444 F.3d 1208 (10th Cir. 2006) (describing narrow standard for interfering with SEC sanctions)
- American Power & Light Co. v. SEC, 329 U.S. 90 (1946) (agency choice of remedy is within administrative competence)
- FCC v. Fox Television Stations, Inc., 556 U.S. 502 (2009) (agencies must explain changes in policy)
- SEC v. First Pac. Bancorp, 142 F.3d 1186 (9th Cir. 1998) (agency precedent can identify sufficient but not exhaustive triggers for labels like “egregious”)
- World Trade Fin. Corp. v. SEC, 739 F.3d 1243 (9th Cir. 2014) (supervisory failures without intent can be deemed egregious)
- PAZ Securities, Inc. v. SEC, 494 F.3d 1059 (D.C. Cir. 2007) (agency must accurately characterize petitioners’ mitigation arguments)
- Saad v. SEC, 718 F.3d 904 (D.C. Cir. 2013) (agency cannot dismiss mitigating factors with a perfunctory statement)
- Cotton Petroleum Corp. v. DOI, 870 F.2d 1515 (10th Cir. 1989) (agency must analyze factors its own guidelines require)
- McCarthy v. SEC, 406 F.3d 179 (2d Cir. 2005) (multi-factor test for assessing whether sanctions are remedial or punitive)
- Horning v. SEC, 570 F.3d 337 (D.C. Cir. 2009) (problems in one area can indicate future risk in another)