Koch v. Securities & Exchange Commission
417 App. D.C. 147
| D.C. Cir. | 2015Background
- Donald Koch, sole owner and adviser of Koch Asset Management (KAM), bought shares in three small banks and directed last‑minute trades to raise their closing prices ("marking the close") in Sept.–Dec. 2009.
- Koch used Huntleigh Securities and its trader Jeffrey Christanell to execute trades; communications (emails and recorded calls) revealed instructions to "get" or "move" closing prices into target ranges.
- Huntleigh investigated, fired the trader, and terminated KAM; the SEC then investigated and charged Koch and KAM with manipulative conduct under the Exchange Act and the Advisers Act and with failing to implement adequate adviser procedures.
- An ALJ found Koch marked the close on several dates; the SEC affirmed and imposed sanctions, including a bar on associating with a broad set of securities‑industry participants (including municipal advisors and nationally recognized statistical rating organizations) under Dodd–Frank–expanded authority.
- Koch petitioned for judicial review, challenging (1) sufficiency of evidence and legal standard for manipulation, (2) that he could be charged as a primary violator under both Acts, and (3) retroactive application of Dodd–Frank remedial provisions.
Issues
| Issue | Plaintiff's Argument (Koch) | Defendant's Argument (SEC) | Held |
|---|---|---|---|
| Whether Commission applied correct legal standard and whether evidence supports finding Koch "marked the close" (manipulation, scienter) | SEC lacked substantial evidence and misapplied law; trades could be legitimate execution in illiquid stocks | Emails, calls, and trading patterns show intent to buy right before close to inflate prices; scienter established | Held for SEC: correct standard applied and substantial evidence supports finding of manipulative intent |
| Whether Koch can be charged as a primary violator under the Exchange Act and Advisers Act | Janus and Advisers Act text limit primary liability; Koch (individual, unregistered) cannot be primary adviser violator | Janus governs statements, not manipulative acts; Advisers Act defines "investment adviser" by conduct, not registration | Held for SEC: Koch properly charged as primary violator under both Acts |
| Whether applying Dodd–Frank’s expanded association bans (municipal advisors and rating agencies) to 2009 conduct is retroactive | Dodd–Frank remedial expansion cannot be applied to pre‑enactment conduct; doing so increases liability retroactively | Dodd–Frank applies to violations and allows broader bars (SEC relied on new authority) | Held for Koch in part: applying Dodd–Frank to bar association with municipal advisors and rating organizations is impermissibly retroactive; other industry bars stand |
Key Cases Cited
- Ernst & Ernst v. Hochfelder, 425 U.S. 185 (establishes scienter requirement for Rule 10b‑5 liability)
- Black v. Finantra Capital, Inc., 418 F.3d 203 (2d Cir. 2005) (defines “marking the close” manipulation)
- Janus Capital Group, Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2011) (limits “maker” liability for false statements)
- Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (manipulative acts can give rise to primary liability)
- Markowski v. SEC, 274 F.3d 525 (manipulator’s unsuccessful attempt still shows intent)
- Santa Fe Indus. v. Green, 430 U.S. 462 (manipulation as artifice to artificially affect market activity)
- Landgraf v. USI Film Prods., 511 U.S. 244 (presumption against retroactivity; need clear congressional intent)
- Vartelas v. Holder, 132 S. Ct. 1479 (retroactive application may attach new disabilities to past conduct)