United States Securities & Exchange Commission v. Bocchino (In re Bocchino)
504 B.R. 403
Bankr. M.D. Penn.2013Background
- Debtor Steven S. Bocchino was a registered broker who sold private placements in Traderz and stock in Fargo Holding to his clients and received commissions.
- The SEC obtained default judgments in two district-court actions against Bocchino requiring disgorgement, interest, and civil penalties for securities violations; Bocchino later filed bankruptcy under Chapter 13.
- SEC filed this adversary to declare the district-court debts nondischargeable under 11 U.S.C. § 523(a)(2) (fraud) and § 1328(a)(2).
- At trial Bocchino testified he did not knowingly lie but had performed little or no independent investigation before soliciting investments, relying on tips from superiors/associates.
- The bankruptcy court found Bocchino’s conduct — minimal or no investigation, selling on second-/third‑hand information, and selling despite red flags — to be extremely and grossly reckless.
- The court ruled disgorgement and related interest nondischargeable as obtained by fraud/recklessness, but civil penalties were dischargeable under Chapter 13 § 1328(a).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether debt for disgorgement and interest is nondischargeable under §523(a)(2) | Disgorgement and ancillary interest arise from fraud/false representations by Bocchino | Bocchino lacked scienter; he did not knowingly make false statements and relied on others | Held nondischargeable: broker’s grossly reckless failure to investigate equates to fraud/scienter for §523(a)(2); disgorgement and interest nondischargeable |
| Whether civil penalties in the SEC judgments are nondischargeable | Civil penalties should be nondischargeable as securities enforcement sanctions | Civil penalties are excepted under other provisions but dischargeable in Chapter 13 under §1328(a) | Held dischargeable: civil penalties are not excepted from discharge under Chapter 13 superdischarge provisions |
| Whether prior default district-court judgments preclude relitigation here (collateral estoppel) | SEC argued collateral estoppel should apply to bar relitigation | Bocchino argued defaults do not establish issues precluding his defense | Held against collateral estoppel: default judgments under those circumstances did not bar Debtor from presenting a defense |
| Standard required to show nondischargeable fraud by a stockbroker | SEC: recklessness/willful blindness suffices for broker scienter in securities context | Bocchino: scienter (intent to deceive) required; mere negligence insufficient | Held that gross recklessness or conscious disregard (akin to willful blindness) suffices for nondischargeability where fiduciary/broker duties exist |
Key Cases Cited
- Securities and Exchange Commission v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963) (investment advisers owe utmost good faith and must avoid misleading clients)
- Bullock v. BankChampaign, N.A., 133 S. Ct. 1754 (2013) (reckless or conscious disregard can be treated as equivalent to intentional misconduct in fiduciary defalcation context)
- Belmont v. MB Inv. Partners, Inc., 708 F.3d 470 (3d Cir. 2013) (Capital Gains Research remains controlling for adviser duties)
- Graham v. Securities and Exchange Commission, 222 F.3d 994 (D.C. Cir. 2000) (reliance on supervisors does not absolve broker’s duty to investigate)
- Hanly v. Securities and Exchange Commission, 415 F.2d 589 (2d Cir. 1969) (failure to investigate is a dereliction of a registered representative’s duty)
- In re Hyman, 502 F.3d 61 (2d Cir. 2007) (securities-law jurisprudence guides the meaning of recklessness/scienter spectrum)
- In re Niles, 106 F.3d 1456 (9th Cir. 1997) (interest ancillary to nondischargeable debt is itself nondischargeable)
- Matter of Jordan, 927 F.2d 221 (5th Cir. 1991) (same: ancillary interest to nondischargeable obligation remains nondischargeable)