Gregory BARTKO, Petitioner v. SECURITIES AND EXCHANGE COMMISSION, Respondent
No. 14-1070
United States Court of Appeals, District of Columbia Circuit.
Argued November 17, 2016. Decided January 17, 2017.
845 F.3d 1217
Gregory Bartko, pro se, filed the briefs for the appellant.
Daniel Matro, Attorney, United States Securities and Exchange Commission, argued the cause for the respondent. John W. Avery, Deputy Solicitor, Dominick V. Freda, and Stephen G. Yoder, Senior Litigation Counsel were with him on brief.
Before: HENDERSON and GRIFFITH, Circuit Judges, and WILLIAMS, Senior Circuit Judge.
KAREN LECRAFT HENDERSON, Circuit Judge:
Between 2004 and 2005, Gregory Bartko masterminded a wide-ranging scheme that sought to defraud investors through the sale of securities. Five years later, Bartko was convicted of conspiracy, selling unregistered securities and mail fraud. Shortly thereafter, the United States Securities and Exchange Commission (SEC or Commission) instituted a follow-on administrative proceeding against him. In that proceeding, the Commission, inter alia, permanently barred Bartko from associating with six classes of securities market participants.1
Bartko‘s petition for review raises multiple challenges to the Commission‘s order. We have accorded each of Bartko‘s arguments “full consideration after careful examination of the record, but address in detail only those arguments that warrant further discussion.” See, e.g., Ozburn-Hessey Logistics, LLC v. NLRB, 833 F.3d 210, 213 (D.C. Cir. 2016); United States v. Garcia, 757 F.3d 315, 321 (D.C. Cir. 2014) (“We have given full consideration to the various additional arguments that [appellant] raises, but find none convincing or worthy of discussion.“). Although we agree with the Commission‘s findings and conclusions, we believe it applied the bar regarding five of the six classes in an impermissibly retroactive manner. For the reasons that follow, we grant the petition in part and deny it in part.
I. BACKGROUND
A. Statutory Landscape
With the enactment of section 203(f) of the Investment Advisers Act of 1940, see
Originally, the Commission read these provisions as authorizing a “collateral bar.” E.g., Meyer Blinder, Exchange Act Release No. 39180, 1997 WL 603788, at *3-5 (Oct. 1, 1997). A collateral bar is a tool by which the SEC can ban a market participant from associating with all classes based on misconduct regarding only one class. See id. at *5-6. Thus, through the imposition of a collateral bar, the Commission could not only bar an investment adviser from associating with the investment adviser class but also from the broker-dealer, municipal securities dealer and transfer agent classes—even if he had no association with those classes. See id.
This Court, however, rejected the Commission‘s notion that section 203(f) of the Advisers Act and sections 15(b), 15B(c) and 17A(c) of the Exchange Act sanctioned a collateral bar. See Teicher v. SEC, 177 F.3d 1016, 1019-20 (D.C. Cir. 1999). In Teicher, we noted that both statutes set forth “an almost identically worded threshold nexus requirement” that “underscore[d] a congressional determination to create separate sets of sanctions....” Id. at 1020. Because each statute required a market participant to be, at a minimum, “seeking to become associated” with a class before he could be barred from it, see
In 2010, the enactment of Dodd-Frank changed the landscape. See Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), Pub. L. No. 111-203, 124 Stat. 1376 (2010). Perhaps in response to the Commission‘s lobbying,2 the Congress empowered it to impose a collateral bar. See Pub. L. No. 111-203, 124 Stat. 1376, 1850-51 (July 21, 2010). In addition, Dodd-Frank expanded the Commission‘s reach, adding two new classes to its purview: municipal advisors and nationally recognized statistical rating organizations (“NRSROs“). See
From 1999 to 2011, Bartko, a securities lawyer, served as the chief executive officer and chief compliance officer of Capstone Partners, L.C., a registered broker-dealer under section 15 of the Exchange Act,
Bartko‘s troubles began in early 2004, when, after creating the two Funds, he began to recruit investors. Rather than undertaking the search for capital himself, Bartko joined John Colvin and Scott Hollenbeck, who took on that task for him. There was a significant problem with this arrangement, however: Colvin and Hollenbeck had a history of using questionable sales tactics. Both had previously been accused of fraudulent sales practices and Hollenbeck was the subject of a cease and desist order regarding securities sales in North Carolina. Despite having access to his two partners’ history, see Joint Appendix 54-57, Bartko made no effort to distance himself from them. Instead, he entered into agreements under which Colvin and Hollenbeck were to raise millions of dollars for the two Funds.
Over the next two years, both Funds’ coffers were filled by way of fraud and deception. For example, Hollenbeck held numerous seminars across the country, inducing investors to give him their money with false claims that their investments were fully insured and had a guaranteed return. His tactics achieved their purpose, as approximately two hundred investors poured hundreds of thousands of dollars into the two Funds.
The actions of Bartko‘s partners did not go unnoticed. In March 2005, an SEC lawyer warned Bartko of Hollenbeck‘s questionable fund-raising techniques. Bartko insisted that Hollenbeck was merely a “finder” for the Funds and further claimed that Hollenbeck only “forward[ed] the names of interested and qualified investors” to him. Joint Appendix 79. In the months that followed, Bartko attempted to work with the Commission. He offered Capstone Fund materials for SEC inspection, allowed the Commission to undertake unannounced “spot” examinations of Bartko‘s business and voluntarily disclosed many confidential financial documents, all—Bartko alleges—in reliance on the Commission‘s assurances that the information was confidential and to be used to investigate Hollenbeck‘s actions only. Additionally, Bartko filed an interpleader action on behalf of the Capstone Fund in the Middle District of North Carolina in a purported attempt to return funds to investors. Investors in the two Funds ultimately lost a total of $885,946.89.
C. Procedural History
In January 2010, Bartko was indicted in the Eastern District of North Carolina on one count of conspiracy, one count of selling unregistered securities and four counts of mail fraud. After a thirteen-day trial, a jury convicted Bartko on all six counts. Bartko sought a new trial, claiming that the prosecution failed to disclose material exculpatory evidence as required by Brady v. Maryland, 373 U.S. 83, 83 S.Ct. 1194, 10 L.Ed.2d 215 (1963), and that it knowingly allowed government witnesses to testify falsely in violation of Napue v. Illinois, 360 U.S. 264, 79 S.Ct. 1173, 3 L.Ed.2d 1217 (1959). The district court denied Bartko‘s motion, emphasizing that “Bartko‘s case was not a close one” as “overwhelming evidence of Bartko‘s guilt” had been presented at trial. United States v. Bartko, No. 5:09-CR-00321-D, at 116-18 (E.D.N.C. Jan. 17, 2012). The Fourth Circuit affirmed Bartko‘s conviction and sentence. United States v. Bartko, 728 F.3d 327, 347 (4th Cir. 2013). Although it recognized that “serious errors” by the government had infected Bartko‘s prosecution, see id. at 343, it found those errors insufficient to overturn his conviction, id. at 342 (“[O]ur confidence in the jury‘s conviction of Bartko was not undermined by the government‘s misconduct in this case.“).
On January 18, 2011, the Commission issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Exchange Act and Section 203(f) of the Advisers Act to further sanction Bartko for his misconduct. In his response, Bartko argued that the government had “unclean hands” based on its misconduct during his criminal trial and on improper collusion between the governmental authorities. Accordingly, Bartko argued that the Commission “should be barred or estopped” from using his tainted conviction as the basis of follow-on action. Joint Appendix 4. An ALJ recommended against Bartko, however, rejecting Bartko‘s discovery request related to his unclean hands defense and applying Dodd-Frank‘s enhanced penalties to bar him from associating with not only the broker-dealer class but also the investment adviser, municipal securities dealer and transfer agent classes.
Bartko then petitioned the Commission for review of the ALJ order. The Commission iterated barring Bartko from acting as a broker-dealer, investment adviser, municipal securities dealer and transfer agent was in the public interest—Bartko demonstrated “a fundamental lack of commitment to investor protection principles,” thereby creating a “risk that he would engage in similar conduct if presented with future opportunities.” Id. at 372. The Commission also rejected Bartko‘s unclean hands defense, noting that the defense “is not generally available in a Commission action.” Id. at 382. But the Commission did not stop there. Instead, it extended Bartko‘s bar to exclude him from the municipal advisor and NRSRO classes as well. The Commission reasoned that imposing Dodd-Frank‘s collateral bar on Bartko (whose misconduct, again, occurred before the enactment of Dodd-Frank) did not constitute an impermissibly retroactive penalty because “[s]uch collateral bars ... are appropriately applied as ‘prospective remedies whose purpose is to protect the investing public from future harm.‘” Id. at 376-77.
Bartko timely petitioned for review. Our jurisdiction is based on
II. ANALYSIS
A. Retroactive Application of Dodd-Frank
Bartko first argues that the Commission‘s imposition of Dodd-Frank‘s collater-
The United States Supreme Court has recognized a “deeply rooted presumption against retroactive legislation,” requiring that “courts read laws as prospective in application unless Congress has unambiguously instructed retroactivity.” See Vartelas v. Holder, 566 U.S. 257, 132 S.Ct. 1479, 1483, 1486, 182 L.Ed.2d 473 (2012) (citing Landgraf v. USI Film Prods., 511 U.S. 244, 263, 114 S.Ct. 1483, 128 L.Ed.2d 229 (1994)). The presumption against retroactive legislation is embedded in several provisions of the Constitution, “among them, the Ex Post Facto Clause, the Contract Clause, and the Fifth Amendment‘s Due Process Clause.” Id. at 1486; accord Ralis v. RFE/RL, Inc., 770 F.2d 1121, 1127-29 (D.C. Cir. 1985) (warning against retroactive application of law given “the inherent repugnance of ex post facto imposition of civil liabilities“).
To determine if a statute runs afoul of the retroactivity prohibition, we ask whether its provisions attach new legal consequences to events completed before its enactment. Landgraf, 511 U.S. at 269-70, 114 S.Ct. 1483. That is, we look to see if the law “impair[s] rights a party possessed when he acted, increase[s] a party‘s liability for past conduct, or impose[s] new duties with respect to transactions already completed.” Nat‘l Mining Ass‘n v. Dep‘t of Labor, 292 F.3d 849, 859 (D.C. Cir. 2002) (alterations in original) (internal quotation marks omitted). In looking for new legal consequences, material adjustments to the “extent of a party‘s liability” may suffice. Landgraf, 511 U.S. at 284, 114 S.Ct. 1483. Not all retroactive application is out of bounds, however—Landgraf recognized that procedural rules “regulate secondary rather than primary conduct” and therefore raise no retroactivity concern. Id. at 275, 114 S.Ct. 1483. Consequently, “[t]he critical question is whether a challenged rule establishes an interpretation that changes the legal landscape.” Nat‘l Mining Ass‘n, 292 F.3d at 859 (internal quotation marks omitted).
We recently applied these principles in a case similar to the instant case. See Koch v. SEC, 793 F.3d 147 (D.C. Cir. 2015). In Koch, an investment adviser petitioned our Court for review of Commission penalties. Id. at 149-50. The Commission had sanctioned him for pre-Dodd-Frank trading violations by, inter alia, barring him from associating with the municipal advisor and NRSRO classes. Id. at 149-51. As noted earlier, however, see supra at 1220-21, the Commission assumed the authority to ban a market participant from those two new classes only after the enactment of Dodd-Frank. See Koch, 793 F.3d at 157-58. Thus, the Koch Court considered a specific question: was “the Commission‘s order barring [the petitioner] from associating with municipal advisors or rating organizations ... impermissibly retroactive[?]” Id. at 152.
We held that the bar was impermissibly retroactive. Id. at 157-58. In so holding, we stated that “by including additional associations from which one could be barred, the Act enhanced the penalties for a violation of the securities laws.” Id. at 158 (emphasis in original). Following Landgraf, we found that “[a]pplying [Dodd-Frank] to [the petitioner] ‘attache[d] new legal consequences’ to his conduct by adding to the industries with which [the petitioner] may not associate.” Id. (fourth alteration in original). Because the Congress did not expressly authorize retrospective application of Dodd-Frank, see id. at 157-58, we vacated the portion of the Commission order that applied Dodd-Frank‘s broader sanctions to Koch‘s pre-Dodd-Frank misconduct, see id.
The Commission‘s attempt to avoid this conclusion is unpersuasive. It primarily rests on its claim that Koch already decided the issue before us. Resp‘t‘s Br. 29-33. According to the Commission‘s reading, Koch implicitly allowed the retroactive application of a collateral bar on the broker-dealer, investment adviser, municipal securities dealer and transfer agent classes notwithstanding the fact that, at the same time, it explicitly prohibited the Commission from extending that bar to the newly regulated municipal advisor and NRSRO classes.6 To support its reading, the Commission believes Koch held that the “limited” collateral bar—that is, the broker-dealer, investment adviser, municipal securities dealer and transfer agent prohibitions—constituted a mere procedural change and therefore did not run afoul of the retroactivity prohibition. Id. at 29. The Commission misreads Koch.
Koch addressed only one issue related to this case: whether the Commission order barring Koch from associating “with municipal advisors or rating organizations” was impermissibly retroactive. Koch, 793 F.3d at 152 (emphasis added). We held that it was and went no further. See id. at 157-58. In fact, we expressly stated that our holding did “not apply to the other securities industries with which Koch may not associate,” id. at 158—that broader issue was neither before nor considered by the Court.7
Koch also argues that applying the Dodd-Frank Act to him is impermissibly retroactive because it changed the Commission‘s procedures for imposing sanctions. It is true that under the Act, the SEC may bar Koch from associating with all industries in the securities market in one proceeding, whereas before the Act the Commission had to initiate “follow-on proceeding[s]” for separate industries in the securities market. This change in procedure, however, does not give rise to retroactivity concerns.
Id. (alteration in original) (internal citations omitted). Plainly, footnote three focuses on “the Commission‘s procedures for imposing sanctions,” adding that under Dodd-Frank, “the SEC may bar [a participant] from associating with all industries in the securities market in one proceeding, whereas before the Act the Commission had to initiate follow-on proceeding[s].” Id. (emphases added). Stated differently, to the extent the Commission was required pre-Dodd-Frank to bring separate follow-on proceedings to bar a market participant from each class he was associated with, Dodd-Frank changed that procedure, instead allowing for one omnibus proceeding at the end of which the Commission could ban a participant from all classes he was associated with. Consolidating separate proceedings into one omnibus proceeding, however, is a procedural change that raises no retroactivity concern. See Landgraf, 511 U.S. at 275, 114 S.Ct. 1483 (“Because rules of procedure regulate secondary rather than primary conduct, the fact that a new procedural rule was instituted after the conduct giving rise to the suit does not make application of the rule at trial retroactive.“).
To repeat, Koch does not go further. Although Koch permits consolidation of pending proceedings, it says nothing about endorsing a collateral bar aimed at classes a market participant is neither associated with nor has sought to become so. Whereas the former is a procedural—and therefore permissibly retroactive—change, the latter has undeniable impermissibly retroactive ramifications. See Martin v. Hadix, 527 U.S. 343, 357-58, 119 S.Ct. 1998, 144 L.Ed.2d 347 (1999) (outlining Supreme Court‘s “commonsense” and “functional” approach to retroactivity). For example, the imposition of a collateral bar significantly diminishes the possibility that a market participant will be able to associate with new classes regardless of the extent of his subsequent rehabilitation. Before Dodd-Frank, the Commission had to establish that a ban on each class was in the public interest, a task it often accomplished by considering the Steadman factors.8 See Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff‘d, 450 U.S. 91, 101 S.Ct. 999, 67 L.Ed.2d 69 (1981). In addition, the Commission had to show that
Dodd-Frank changed this landscape. Now, the Commission may impose a collateral bar covering each class during an omnibus proceeding at To. See 124 Stat. at 1850-51. In effect, then, Dodd-Frank changed when the Commission must apply a Steadman analysis to determine whether it is in the public interest to bar a market participant from classes that he was not associated with at To—whereas before Dodd-Frank, the Commission was required to wait until T₁ before making that determination (a delay that required the Commission to take into account any intervening rehabilitation that may have occurred since To), the Commission may now use its To public interest analysis to bar the participant from those additional classes in the first proceeding. This front-loading deprives the participant of the ability to avoid a broader ban at T₁ by undergoing ”Steadman rehabilitation” after To. Moreover, Dodd-Frank‘s enactment also switches the burden of persuasion. After Dodd-Frank, it is the responsibility of the market participant (not the Commission) to show at T₁ that reinstatement to (rather than debarment from) a given class “would be consistent with the public interest,”
Accordingly, we conclude that the Commission abused its discretion in barring Bartko from associating with the investment adviser, municipal securities dealer and transfer agent classes because those bars are impermissibly retroactive. See
B. Unclean Hands
Bartko also claims that the Commission erred in failing to consider, or allow discovery regarding, his unclean hands defense. In light of government misconduct affecting both the Commission investigation of Bartko9 and his subsequent
Generally speaking, the unclean hands doctrine requires that a party seeking equitable relief “show that his or her conduct has been fair, equitable, and honest as to the particular controversy in issue.” 27A AM. JUR. 2d Equity § 98 (Nov. 2016). If a plaintiff does not act “fairly and without fraud or deceit,” the unclean hands doctrine affords a defendant a complete defense. See Precision Instrument Mfg. Co. v. Auto. Maint. Mach. Co., 324 U.S. 806, 814-15, 65 S.Ct. 993, 89 L.Ed. 1381 (1945). Ultimately, the unclean hands doctrine rests on the principle that “he who comes into equity must come with clean hands.” Shondel v. McDermott, 775 F.2d 859, 867-68 (7th Cir. 1985).
The application of the unclean hands doctrine to the government, however, is far from categorical. Although the Supreme Court has left open the question of whether there exists a “flat rule that [unclean hands] may not in any circumstances run against the Government,” it has nonetheless recognized that “the Government may not be estopped on the same terms as any other litigant.” Heckler v. Cmty. Health Servs., 467 U.S. 51, 60, 104 S.Ct. 2218, 81 L.Ed.2d 42 (1984). The government receives this special treatment based on the notion that “[w]hen the Government is unable to enforce the law because the conduct of its agents has given rise to an estoppel, the interest of the citizenry as a whole in obedience to the rule of law is undermined.” Id.; accord SEC v. Gulf & W. Indus., 502 F.Supp. 343, 348 (D.D.C. 1980) (denying unclean hands defense “because it may not be invoked against a governmental agency which is attempting to enforce a congressional mandate in the public interest“). Nevertheless, Heckler suggests that the unclean hands doctrine may apply where “the public interest in ensuring that the Government can enforce the law free from estoppel [is] outweighed by the countervailing interest of citizens in some minimum standard of decency, honor, and reliability in their dealings with their Government.” Heckler, 467 U.S. at 60-61, 104 S.Ct. 2218. “Where courts have permitted equitable defenses to be raised against the government, they have required that the agency‘s misconduct be egregious and the resulting prejudice to the defendant rise to a constitutional level.” SEC v. Elecs. Warehouse, Inc., 689 F.Supp. 53, 73 (D. Conn. 1988), aff‘d, 891 F.2d 457 (2d Cir. 1989).
Bartko‘s case does not fit within the narrow window outlined in Heckler and Electronics Warehouse. The Fourth Circuit expressly held that any prejudice stemming from the government‘s misconduct during Bartko‘s investigation and prosecution failed to rise to a constitutional level. Bartko, 728 F.3d at 331-32, 342 (“[O]ur the jury‘s conviction of Bartko was not undermined by the government‘s misconduct in this case.“). Nothing in the record casts doubt on that conclusion. Moreover, underscoring Bartko‘s failure to meet Heckler‘s and Electronics Warehouse‘s threshold requirement is the Commission‘s finding that Bartko demonstrated “a fundamental lack of commitment to investor protection principles” and that there existed a “risk that he would engage in similar
For the foregoing reasons, the portion of Bartko‘s petition that challenges the investment adviser, municipal securities dealer and transfer agent bar is granted.10 The remainder of Bartko‘s petition is denied.
So ordered.
KAREN LECRAFT HENDERSON
UNITED STATES CIRCUIT JUDGE