Malouf v. SEC. & Exch. Comm'n
933 F.3d 1248
10th Cir.2019Background
- Dennis Malouf sold his Raymond James broker-dealer branch to Maurice Lamonde while remaining the principal at UASNM, an investment-adviser firm; the sale price was paid via installment payments tied to commissions generated by routing UASNM bond trades through the sold branch.
- Malouf routed many UASNM bond trades to the Raymond James branch without soliciting competing bids, despite UASNM procedures requiring solicitation and his concession that better prices were likely available.
- Malouf was responsible for reviewing UASNM’s Forms ADV and website disclosures but did not disclose to UASNM compliance personnel or an outside consultant that he was receiving ongoing payments from Lamonde, creating an undisclosed conflict of interest.
- UASNM’s public materials falsely represented that employees received no commissions and that advice was impartial; those misstatements were not corrected until about nine months after an outside consultant discovered Malouf’s payments.
- The SEC and an ALJ found Malouf violated Rule 10b-5, sections 17(a) and 206 of the Advisers Act (among other provisions), imposed sanctions (ALJ: 7.5-year bar and $75,000 penalty), and the SEC: lifetime industry bar, disgorgement of $562,001.26 plus prejudgment interest, and $75,000 penalty.
Issues
| Issue | Plaintiff's Argument (Malouf) | Defendant's Argument (SEC) | Held |
|---|---|---|---|
| Appointments Clause challenge to ALJ | Malouf: ALJ was an inferior officer whose appointment violated the Appointments Clause | SEC: Malouf forfeited the claim by not raising it in agency proceedings; statutory exhaustion required | Forfeited; Malouf failed to exhaust administrative remedies, so claim not reached on merits |
| Liability for failing to correct firm misstatements under Rule 10b-5 and §17(a) | Malouf: Failure to correct is not an independent violation distinct from making misstatements; scienter lacking | SEC: Under Lorenzo, disseminating or failing to correct another’s false statements can violate 10b-5(a)/(c) and §17(a) when linked to deceptive scheme; evidence shows recklessness/ scienter | Affirmed: failure to correct supported violations; substantial evidence of scienter (extreme recklessness) |
| Advisers Act §206 liability and aiding/abetting UASNM violations | Malouf: No duty to seek best execution personally; delegated compliance; lacked scienter and substantial assistance | SEC: Adviser fiduciary duty includes best execution; Malouf’s undisclosed financial interest and routing practices breached duties and substantially assisted UASNM’s misstatements | Affirmed: §206(1)/(2) violations and aiding/abetting supported by substantial evidence; best-execution duty applied to him |
| Sanctions: lifetime bar and disgorgement | Malouf: Sanctions excessive; payments were lawful profits; he had made some disclosures and paid restitution | SEC: Malouf willfully violated or aided/abetted violations; delayed disclosure and failure to accept responsibility support harsh sanctions; disgorgement is a reasonable approximation of ill-gotten gains | Affirmed: lifetime bar and disgorgement not an abuse of discretion |
Key Cases Cited
- Geman v. SEC, 334 F.3d 1183 (10th Cir. 2003) (standard for review of SEC factual findings)
- C.E. Carlson, Inc. v. SEC, 859 F.2d 1429 (10th Cir. 1988) (definition of substantial evidence and exhaustion principles)
- Ross v. Blake, 136 S. Ct. 1850 (2016) (statutory exhaustion is mandatory; courts cannot excuse failure to exhaust absent statutory exception)
- Lucia v. SEC, 138 S. Ct. 2044 (2018) (SEC ALJs are inferior officers under the Appointments Clause)
- Freytag v. Commissioner, 501 U.S. 868 (1991) (framework for determining whether adjudicators are inferior officers)
- Lorenzo v. SEC, 139 S. Ct. 1094 (2019) (Rule 10b-5(a) and (c) can reach defendants who disseminate or engage in schemes involving another’s misstatement)
- Aaron v. SEC, 446 U.S. 680 (1980) (requirements of scienter for certain §17(a) violations)
- Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266 (3d Cir. 1998) (duty of best execution described)
- SEC v. Zandford, 535 U.S. 813 (2002) (fiduciary obligations under securities laws)
- Maxxon, Inc. v. SEC, 465 F.3d 1174 (10th Cir. 2006) (disgorgement need only be reasonable approximation of illegal profits)