6 F.4th 255
2d Cir.2021Background
- Donald J. Fowler was a J.D. Nicholas broker who, beginning in 2011, recommended a high-frequency, "event-driven" trading strategy that produced extremely high turnover (avg. ~116x/year) in customer accounts and large per-trade fees and margin usage.
- Customers suffered substantial losses (thirteen trial-focus customers lost $467,627 combined); many trades were made without prior customer approval according to phone-record analysis admitted at trial.
- The SEC investigated beginning in 2014; Fowler and the SEC executed tolling agreements in 2016 that extended the five-year limitations period from March 1, 2016 to February 28, 2017; the SEC sued January 9, 2017.
- A jury found Fowler liable under Section 10(b), Rule 10b-5, and Sections 17(a)(1)–(3) for recommending an unsuitable strategy, making unauthorized trades, and making false/misleading statements.
- The district court ordered disgorgement, a permanent injunction, and civil penalties of $150,000 per each of the 13 customers (total $1,950,000); the Second Circuit affirmed but modified disgorgement downward to correct an agreed math error.
Issues
| Issue | Plaintiff's Argument (SEC) | Defendant's Argument (Fowler) | Held |
|---|---|---|---|
| Whether 28 U.S.C. § 2462 is jurisdictional and untollable | §2462 is a jurisdictional bar; the five-year limit cannot be tolled by agreement | §2462 is not jurisdictional; parties can toll it | §2462 is nonjurisdictional; tolling agreement enforceable; suit timely |
| Whether excessive trading must be pleaded/proved as churning rather than suitability | Agency may proceed on a reasonable-basis suitability theory based on excessive, high-cost trading | Excessive trading is a churning (quantitative) claim and not an appropriate suitability claim here | Suitability claim based on excessive trading was permissible; churning and suitability can overlap |
| Proof required to establish unauthorized trades (need for each customer to testify) | Customer testimony is required to prove lack of authorization for each trade | Phone records summary and limited testimony sufficiently proved lack of authorization | Phone-record summary (Fed. R. Evid. 1006) plus testimony was sufficient; additional customers’ testimony not required |
| Unit of violation for Tier III civil penalties and constitutionality of penalty size | Counting each defrauded customer as a separate violation is permissible; penalties discretionary; $150k per customer appropriate | Penalties should be capped differently (single-violation or tied to disgorgement); excessive under Due Process/Eighth Amendment | Court may treat each victim as a separate violation; penalty within statutory/discretionary bounds and not unconstitutional |
| Disgorgement calculation after Liu (deductible legitimate expenses) | Disgorgement must deduct legitimate business expenses per Liu | District court failed to deduct additional legitimate expenses | No additional legitimate expenses identified; district court’s disgorgement reasonable but corrected for a conceded postage-fee math error |
Key Cases Cited
- Henderson ex rel. Henderson v. Shinseki, 562 U.S. 428 (2011) (filing deadlines are claim-processing rules and not jurisdictional absent clear congressional intent)
- United States v. Kwai Fun Wong, 575 U.S. 402 (2015) (statutory bars are jurisdictional only with clear congressional statement)
- John R. Sand & Gravel Co. v. United States, 552 U.S. 130 (2008) (reviser’s changes in phraseology do not presumptively alter substantive law)
- Sebelius v. Auburn Regional Medical Center, 568 U.S. 145 (2013) (time limits are jurisdictional only in exceptional historical circumstances)
- Lorenzo v. SEC, 139 S. Ct. 1094 (2019) (overlap among securities-law provisions and SEC enforcement theories)
- SEC v. Pentagon Capital Management PLC, 725 F.3d 279 (2d Cir. 2013) (district court may count multiple trades or victims as separate violations for penalty calculation)
- SEC v. Rajaratnam, 918 F.3d 36 (2d Cir. 2019) (factors to determine appropriate civil penalty for securities violations)
- SEC v. Razmilovic, 738 F.3d 14 (2d Cir. 2013) (disgorgement need only be a reasonable approximation; uncertainties bear on the wrongdoer)