SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. COLONIAL INVESTMENT MANAGEMENT LLC, Colonial Fund LLC, and Cary G. Brody, Defendants-Appellants.
No. 09-3503-cv.
United States Court of Appeals, Second Circuit.
June 17, 2010.
Having conducted an independent and de novo review, we affirm the district court‘s dismissal of Appellant‘s complaint and grant of summary judgment for substantially the same reasons stated by the district court in its thorough and well-reasoned order. Furthermore, we find that the district court did not abuse its discretion in denying Appellant‘s Rule 60(b) motion because Appellant failed to show “exceptional circumstances” warranting reconsideration of the district court‘s order, either on the grounds of newly discovered evidence or fraud. See Ruotolo v. City of New York, 514 F.3d 184, 191 (2d Cir.2008).
We have considered all of Appellant‘s remaining arguments on appeal and find them to be without merit.
For the foregoing reasons, the judgment and order of the district court are AFFIRMED.
David Lisitza, Senior Counsel, (David M. Becker, Gen. Counsel; Mark D. Cahn, Deputy Gen. Counsel; Jacob H. Stillman, Solicitor; Randall W. Quinn, Asst. Gen. Counsel, on the brief), Securities and Exchange Commission, Washington, D.C., for Plaintiff-Appellee.
PRESENT: B.D. PARKER, DEBRA ANN LIVINGSTON and GERARD E. LYNCH, Circuit Judges.
SUMMARY ORDER
The Securities and Exchange Commission (“SEC“) brought this action against Defendants-Appellants Colonial Investment Management LLC, Colonial Fund LLC, and Cary G. Brody (collectively “Colonial” or “defendants“) for engaging in transactions that the SEC alleged violated Rule 105 of Regulation M,
1. Liability
Initially, we reject defendants’ contention that the version of Rule 105 promulgated after 2007 was retroactively applied to their conduct. The SEC‘s complaint charged violations of the version of Rule 105 in place at the time of the challenged transactions, and the district court clearly applied that version of the Rule in its findings. The only question in this appeal with respect to liability is whether there was sufficient evidence to support the district court‘s conclusion that the defendants violated the version of the Rule in place at the time of their conduct.
A. General Standards
In a civil enforcement proceeding, the SEC must prove a violation of the relevant statute or rule by a preponderance of the evidence, see, e.g., SEC v. Posner, 16 F.3d 520, 521 (2d Cir.1994); SEC v. Enters. Solutions, Inc., 142 F.Supp.2d 561, 573 (S.D.N.Y.2001), meaning that the SEC in this case had the burden to show that it was “more likely than not” that defendants violated Rule 105, see United States v. Basciano, 599 F.3d 184, 202 (2d Cir.2010). Because the district court‘s conclusion that the defendants violated Rule 105 is “predominantly factual,” we review the court‘s findings only for clear error. In re Am. Express Merchants’ Litig., 554 F.3d 300, 316 n. 11 (2d Cir.2009), vacated and remanded on other grounds sub nom. Am. Express Co. v. Italian Colors Rest., — U.S. —, 130 S.Ct. 2401, 176 L.Ed.2d 920 (2010); see also SEC v. Cayman Islands Reins. Corp., 734 F.2d 118, 119 (2d Cir.1984) (per curiam). Under this standard, we only review whether the district court‘s “account of the evidence is plausi-
Until it was amended in 2007, Rule 105 provided that:
In connection with an offering of securities for cash pursuant to a registration statement or a notification on Form 1-A ... filed under the Securities Act, it shall be unlawful for any person to cover a short sale with offered securities purchased from an underwriter or broker or dealer participating in the offering, if such short sale occurred during ... [t]he period beginning five business days before the pricing of the offered securities and ending with such pricing....
B. Trades Involving Banc of America Securities (BAS)
We conclude that the district court did not clearly err in concluding that the two of defendants’ trades facilitated by BAS as defendants’ prime broker violated Rule 105. The district court was entitled to credit the testimony of Claudia Lewis, a former prime brokerage compliance manager at BAS who reviewed data concerning defendants’ trades. Lewis concluded that defendant Colonial Fund LLC instructed BAS to use the shares allocated to defendants in secondary offerings to cover Colonial‘s short positions in the relevant stock. It was BAS‘s policy not to cover a short position unless specifically instructed by the customer to do so. The district court was entitled to disbelieve the testimony of Colonial‘s “back office personnel” that Colonial gave no such instructions because such orders had to have come from BAS‘s customers and because these “personnel” could not explain how they knew allocated shares were not used to cover short positions and admitted that they did nothing to prevent it. Lewis also noted that the prices of the securities Colonial used to cover its short positions were identical to the prices at which Colonial purchased allocated shares. Finally, BAS‘s data confirmed that Colonial used a “first in first out” (“FIFO“) liquidation method; the district court did not clearly err in considering the purported evidence to the contrary, on which defendants also rely on appeal, of low probative value. It was also undisputed that Colonial acquired shares from secondary offerings before engaging in open-market transactions in the same stock. Thus the evidence supported the conclusion that defendants “cover[ed] short sale[s] with offered securities” prior to acquiring new securities on the open market.
C. Trades Involving Goldman Sachs Execution and Clearing (GSEC)
The district court similarly did not clearly err in concluding that defendants
[a]ll buys and sells of the same security in the same base account would be netted against each other and any existing position throughout the day such that the account would have one position in the particular security at the end of the trading day.... GSEC‘s practice was that if a customer had a short position in a particular security in a particular base account and the customer purchased or otherwise acquired shares of that security, those purchases and receipts would be netted against the short position unless the customer gave specific instructions otherwise.
Miller Decl. ¶ 20 (emphasis added). It was undisputed that defendants gave no such “specific instructions,” although they could have (but did not) use a specific type of account that would have prevented GSEC from covering short positions with allocated shares. Finally, Colonial‘s purchases of the allocated shares were the first purchases of the day, and GSEC used the FIFO method to liquidate Colonial‘s short positions. This, we conclude, was sufficient evidence taken together to support the district court‘s findings. The court was entitled to disbelieve defendants’ internal records, which, defendants contend, demonstrate that Colonial‘s short positions were covered by shares purchased in the open market, because these records were inconsistent and sloppy and because there was no evidence that defendants told their brokers that allocated shares should not be used to cover short positions.
2. Remedies
Defendants raise challenges to three of the remedies ordered by the district court: the permanent injunction against future violations of Rule 105, the award of prejudgment interest, and the civil penalty imposed on Brody individually. We review the remedies ordered by the district court for abuse of discretion. See SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1100 (2d Cir.1972) (injunctive relief); see also Advance Pharm., Inc. v. United States, 391 F.3d 377, 398 (2d Cir.2004) (monetary penalties and injunctive relief).
A. Permanent Injunction
A permanent injunction against future violations of the securities laws is warranted where “the defendant‘s past conduct indicates that there is a reasonable likelihood of further violation in the future.” SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 99 (2d Cir.1978) (alteration and internal quotation marks omitted). A district court may take into account the following factors, among others, in determining whether to issue a permanent injunction:
the fact that defendant has been found liable for illegal conduct; the degree of scienter involved; whether the infraction is an “isolated occurrence;” whether defendant continues to maintain that his past conduct was blameless; and whether, because of his professional occupation, the defendant might be in a position where future violations could be anticipated.
Id. at 100 (quoting SEC v. Commonwealth Chem. Sec., Inc., 410 F.Supp. 1002, 1020 (S.D.N.Y.1976)); see also SEC v. Cavanagh, 155 F.3d 129, 135 (2d Cir.1998). Applying these factors, it is clear the district court did not abuse its discretion in permanently enjoining defendants from future violations of Rule 105. The violations at issue here were in no way “isolated“; indeed, defendants admitted to seven violations of the Rule and were found liable for eighteen. The pattern of defendants’
B. Award of Prejudgment Interest
Defendants contend that it was an abuse of discretion for the district court to award prejudgment interest on the amounts it ordered defendants to disgorge because the SEC delayed in bringing the case against them. We rejected an identical argument in SEC v. First Jersey Securities, Inc., 101 F.3d 1450, 1476–77 (2d Cir.1996).
C. Monetary Penalty on Brody
The district court imposed a “Second tier” monetary penalty on Brody in the amount of $450,000, $25,000 per violation. See
3. Conclusion
We have considered defendants’ remaining arguments on appeal and conclude that they are without merit. For the foregoing reasons, the judgment of the district court is AFFIRMED.